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Transcript of Blocher Preface
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Cost Management
A Strategic Emphasis
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Cost Management
A Strategic Emphasis Fourth Edition
Edward J. Blocher University of North Carolina at Chapel Hill Kenan-Flagler Business School
David E. Stout Youngstown State University Williamson College of Business Administration
Gary Cokins Strategist, Performance Management Solutions SAS/Worldwide Strategy
Kung H. Chen University of Nebraska—Lincoln School of Accountancy
Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. LouisBangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico CityMilan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto
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COST MANAGEMENT: A STRATEGIC EMPHASIS
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221Avenue of the Americas, New York, NY, 10020. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 0 CCW/CCW 0 9 8 7 6
ISBN: 978-0-07-312815-3 MHID: 0-07-312815-5
Editorial director: Stewart Mattson Executive editor: Tim Vertovec Developmental editor: Daryl Horrocks Executive marketing manager: Krista Bettino Senior media producer: Victor Chiu Project manager: Bruce Gin Production supervisor: Gina Hangos Designer: Cara David Supplement producer: Ira C. Roberts Media project manager: Matthew Perry Cover design: Dave Seidler Typeface: 10/12 Times Roman Compositor: Laserwords Private Limited, Chennai, India Printer: Courier Westford
Library of Congress Cataloging-in-Publication Data
Cost management: a strategic emphasis/Edward J. Blocher . . . [et al.].—4th ed. p. cm. Includes index. ISBN: 978-0-07-312815-3 (alk. paper) MHID: 0-07-312815-5 (alk. paper) 1. Cost accounting. 2. Managerial accounting. I. Blocher, Edward. HF5686.C8B559 2008 658.15'52—dc22
2006017239
www.mhhe.com
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We dedicate this edition . . .
To my wife Sandy, and our children Joseph and David
Ed Blocher
To my wife Anne, and our children David John and Kevin Michael
David E. Stout
To my wife Pam Tower, and my mentor Robert A. Bonsack, a true craftsman in the field of cost management
Gary Cokins
To my wife Mary, and our children Robert and Melissa
Kung Chen
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vi
Meet the Authors
Edward J. Blocher is Professor of Accounting at the Kenan-Flagler Business School at the University of North Carolina. He received his bachelor’s degree in economics from Rice University, his MBA degree from Tulane University, and his PhD in accounting from the University of Texas at Austin. He has been a faculty member at the University of North Carolina since 1976. He has also been on the faculty of Northwestern University. Professor Blocher presents regularly on strategic cost management at the national meetings of both the American Accounting Association and the Institute of Management Accountants.
While he is involved in a number of accounting organizations, Professor Blocher has been most continually active in the Institute of Management Accountants (IMA), where he is now a trustee of the IMA/FAR (Foundation for Applied Research). He is a Certifi ed Management Accountant (CMA), has taught review courses for the CMA exam, and has served on the Institute’s national education committee. He also presents regularly at the annual national conference of the IMA. Professor Blocher is the author or coauthor of several articles appear-ing in various journals.
Putting research and teaching into practice is important to Professor Blocher, who has worked closely with other fi rms and organizations in developing products, publications, and teaching materials. He was the principal designer of an accounting analysis system developed by Financial Audit Systems, Inc. Also, he has worked with Blue Cross and Blue Shield of North Carolina, the American Institute of CPAs, KPMG Peat Marwick, Grant Thornton, and the Chancellor’s Offi ce at the University of North Carolina at Chapel Hill, among others.
David E. Stout is the John S. and Doris M. Andrews Professor of Accounting, Williamson College of Business Administration, Youngstown State University. Previously, he held the position of the John M. Cooney Professor of Accounting, College of Commerce & Finance, Villanova University. David earned his PhD (1982) from the University of Pittsburgh and teaches primarily in the cost/managerial accounting area. He served previously as editor of Issues in Accounting Education and serves currently as an associate editor of the Journal of Accounting Education and as a member of the editorial board of: Issues in Accounting Education; the Journal of International Accounting, Auditing & Taxation; China Finance and Accounting Review, and Management Accounting Quarterly/Strategic Finance. In addition, he serves as a member of the editorial advisory board of Accounting Education: An International Journal. Professor Stout has published over 60 articles in numerous professional and academic journals including Advances in Accounting Education, Issues in Accounting Education , the Journal of Accounting Education, The Accounting Educators’ Journal, Advances in Accounting Education, Behavioral Research in Accounting, Educational and Psychological Measurement, Management Accounting, Management Accounting Quarterly, Financial Practice and Education, Strategic Finance, and Advances in Accounting . David is past president of the Teaching and Curriculum (T&C) Section of the AAA, and president-elect of the Academy of Business Education (ABE).
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Meet the Authors vii
Gary Cokins is a strategist in performance management solutions with SAS, the world’s largest privately owned software vendor. He is an internationally recognized expert, speaker, and author in advanced cost management and performance improvement systems. Gary received a BS degree with honors in Industrial Engineering/Operations Research from Cornell University in 1971. He received his MBA from Northwestern University’s Kellogg School of Management in 1974.
Gary serves on activity-based information committees including CAM-I, APICS, the Supply Chain Council, the Council for Logistics Management (CLM), the Institute of Management Accountants (IMA), the American Society for Quality (ASQ), the Purchasing Management Association of Canada (PMAC), the Institute of Industrial Engineers (IIE), Association for Management Information in Financial Services (AMI/fs), and the American Institute of CPAs (AICPA).
Kung H. Chen is the Steinhardt Foundation Professor of Accounting and the Director of Graduate Programs in the School of Accountancy at the University of Nebraska-Lincoln. A graduate of National Taiwan University, he earned his MBA degree from West Virginia University and a PhD from the University of Texas-Austin.
Professor Chen has published his research in various journals, including The Account-ing Review, Encyclopedia of Accounting, Internal Auditor, Journal of Business Finance and Accounting, Behavioral Research in Accounting, Journal of Accounting Literature, Advances in Accounting, Financial Management , and the International Journal of Accounting and has presented research papers to audiences in several countries including the United States, New Zealand, Japan, Taiwan, Korea, and China.
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viii
Clarity of vision and the proper perspective can often mean the difference between confusion and understanding. Viewed up close, the eye chart featured on the cover of Cost Management: A Strategic Emphasis appears like a normal examination tool. Taken at a distance, though, the message is clear. Bringing the big picture into focus is a guiding principle not only in this textbook, but also in the busi-ness of cost management. The function of cost accounting is to organize unclear data and use sound judgment to supply managers with useful and timely information. The goal of Cost Management is to provide cost accountants with the tools they need to make this happen.
Cost Management by Blocher, Stout, Cokins, and Chen uses a strategic emphasis to make the connec-tions between concepts and procedures clear to students. Making students see the relevance of cost management concepts and procedures, and demonstrating how they will use this information in the future, is a recurring theme of each chapter.
Once viewed simply as technical experts in accounting methods and procedures, accountants now play a critical role as participants on multifunctional management teams. Along with the important tradi-tional cost management methods and procedures, Cost Management provides a context for students by using a unique strategic framework. This organization helps students gain an understanding of how learning cost accounting techniques can better serve the company as a whole:
Strategic Framework
Part I: Introduction to Cost Management
Part II: Planning and Decision Making
Part III: Process Costing and Cost Allocation
Parts IV and V: Operational Control and Management Control
Part VI: Advanced Topics in Cost Management
The introductory chapters develop important strategic concepts like strategy development and implementation, the Value Chain, Cost Concepts, the Balanced Scorecard,
and Activity-Based Costing (ABC)
Part II examines how cost estimation, budgeting, and decision making help companies maintain a competitive
advantage
Parts IV and V examine performance measurement at the operational and managerial level, with the goal of linking
management incentives to strategy
Part III examines how process costing and cost allocation are used to determine product costs and to
evaluate a company’s operations
Part VI examines three strategically important advanced areas in cost management: executive compensation,
business valuation, and capital budgeting
Blocher/Stout/Cokins/Chen:
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Bringing the Big Picture into Focus for Your Students
REAL-WORLD FOCUS Commodities and Cost Leadership: PCs, Cell Phones, and Airlines
A commodity is a product or service that is difficult to differentiate and, as a result, becomes a natural for cost leadership competition. Exam-ples include building materials, many consumer electronics products, and many of the things we buy in supermarkets. Thomas L. Friedman, award-winning columnist and author, has addressed the issue of com-modities in the current business environment in his new book, TheWorld Is Flat. One reason the “world is flat” is because any product or service that is a commodity will find its low-cost supply anywhere in the world—wherever there is the lowest cost. Commenting on India’s growth in outsourcing work from other countries, Friedman notes that the portion of work that can be digitized is a good candidate for out-sourcing. He provides examples from the accounting profession (tax return preparation) and journalism (press releases, company reports); these activities are being outsourced to the low-cost supplier. The ac-countant or journalist instead provides value-adding services to the customer (such as tax planning, financial analysis, and news analy-sis). Some parts of the work are in effect “commoditized.”
Other examples of commodities include personal computers (PCs), cell phones, and airlines. The PC industry, dominated by Dell Computer, has seen sales rise while profits fall. Dell manages to main-
tain its growth in profits and sales by moving successfully into new markets (China) and product lines (television sets and digital music players).
As in the PC industry, where prices have fallen as product per-formance has risen, prices and cost competition have increased in the cell phone industry as new manufacturers have entered the mar-ket and regulatory changes in the United States make it easier for users to switch providers.
The airline industry continues to move in the direction of the low-cost carriers, as shown by the trend by the carriers to charge for once-free items such as pillows, meals, and headsets.
Source: Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-First Century, Farrar, Straus, and Giroux, New York 2005; “Less Friendly Skies,” BusinessWeek, July 11, 2005, p. 16; “Pricing Pressure Squeezes Cellphone Makers World-Wide,” The Wall Street Journal, January 15, 2005, p. B1; “Dell Effect Is under Strain as PC Maker Swells,” by Gary McWilliams, The Wall Street Journal, August 17, 2005, p. C1; “For Dell, Success in China Tells Tale of Maturing Market,” The Wall Street Journal , July 5, 2005, p. 1; “PC Makers: More Sales, Fewer Profits,” BusinessWeek, September 3, 2003, pp. 46–47; Pete Engardio, “The Future of Outsourcing,” BusinessWeek, January 30, 2006, pp. 50–64.
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Real-World Focus. All firms strive to have a competitive edge—for some it may be low cost, for others it might be high quality or unique product features. Cost Management, 4e teaches how accounting systems can add value to the organization by providing relevant data for planning, control, and decision-making. The Real-World Focus boxes take real companies and demonstrate strategy in action.
In areas related to the management accounting function, the Financial Executives Institute (FEI) provides services much like those provided by the IMA for financial managers, includ-ing controllers and treasurers.
Because one of the management control responsibilities of the management accountant is to develop effective systems to detect and prevent errors and fraud in the accounting records, the management accountant commonly has strong ties to the control-oriented organizations such as the Institute of Internal Auditors (IIA).
Even if you’re on the right track, you’ll get run over if you just sit there. Will Rogers
Cost Management in Action A Case in Competitive Strategy: Wal-Mart and Target
Wal-Mart and Target are two of the most successful retailers in the United States Wal-Mart bears the slogan, “Always Low Prices,” while Target stores say “Expect More, Pay Less.” If you have shopped at either of these stores you will likely have formed an opinion about the stores and how they compete.
Required
Based on your experience, explain what you think are the competitive strategies of these retailers. Are they key competitors, targeting the same customers? Do you think each firm has adopted the most effec-tive strategy? Why or why not?
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Recently Wal-Mart has begun to advertise in the high-fashion maga-zine Vogue. How does this fi t the fi rm’s strategy, or does it? While customer’s are pleased with Wal-Mart’s low prices, there is ongoing controversy about the firm’s negative effect on other retail-ers where Wal-Marts are located. For example, the closing of 30 su-permarkets in Oklahoma City in recent years has been attributed to Wal-Mart’s arrival. What are your thoughts on the controversy? Are the ethical principles and standards of the management accountant relevant in this context?
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To augment this coverage, the Blocher team encourages students to further explore real-world companies through
Cost Management in Action boxes. This feature poses important questions that make students think critically about how cost accounting affects management strategy. The authors then supply their comments for the Cost Management in Action boxes at the end of each chapter.
Problem Material. The Blocher team has taken great care to develop problems and cases that effectively demonstrate the strategic issues presented in each chapter. Included is a variety of exercises and problems that deal with strategic, international, service, and ethics issues. All problems are marked appropriately for easy identification, including problems that require the use of Excel:
y, g p p , y gpackers work full-time on that jacket, the fi rm could manufacture only 36,000 units ofbecause of limited capacity on the sewing machine.
The production planner can determine the best production mix by examining all of thsible production possibilities in the darker shaded area, from 36,000 on the Gale axis toA where the constraints intersect, and then to the point 22,400 on the Windy axis. Themix with the highest contribution must be one of these three points: 36,000 of Gale, poor 22,400 units of Windy. The solution, called the corner point analysis, is obtained by fi the total contribution at each point and then choosing the point with the highest contrib
EXHIBIT 9.22Windbreakers Production and Sales PossibilitiesTwo Production Constraints—Sewing Machine and Inspection
36,000
67,200
Units
of S
ales
for G
ale
24,00022,400
Units of Sales for Windy
Production constraint for inspection and packaging
A (4,800 Gale, 20,800 Windy)
Production constraint for sewing machine
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Clear and concise exhibits help illustrate basic and complicated topics throughout the book.
The supplemental Cases and Readings manual challenges students to think about and use cost management information in a real-world setting. The longer articles in the manual help integrate case studies and articles into more detailed discussions about cost management.
Strategy International Service Ethics Excel
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In this edition, the authors made extensive changes to nearly every chapter. They increased focus on the strategic role of
cost management, both in the text and in the exercises and problems for each chapter. Careful revisions were made in each
chapter to enhance the clarity and exposition, with the goal of presenting the content in a student-friendly manner. Numerous
Real-World Focus items were added or revised in each chapter, along with additional Cost Management in Action boxes. The
Blocher team also made these critical changes for this edition:
New brief exercises (10–12 per chapter) provide a valuable resource for the instructor to ask short questions, most of which require a short calculation. These can be used to assess student preparation of the material or to begin the class discussion with some focused questions on the chapter material. In contrast to the questions, the brief exercises focus on calculation; in contrast to the exercises, brief exercises can be used in class without prior assignment to the students.
A new supplement, the Excel Solutions Manual, is provided for all end-of-chapter problems and exercises. This manual is provided in two versions: an instructor version (containing both data inputs and solutions) and a student version (containing data inputs only). Instructors now have the fl exibility to make assignments
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where students prepare Excel solutions to any exercise or problem in the text. Because all input data are provided to students, data-entry errors on the part of students are minimized—all students begin each spreadsheet assignment with the same set of data. At the instructor’s discretion, completed spreadsheets can be printed or posted to the Web for access by students.
A signifi cantly enhanced Test Bank features new multiple-choice questions and problems linked to learning objectives and level of diffi culty.
New cases are provided for use with the activity-based
casting software of SAS Institute; improvements in the tutorials and materials have been made for increased ease-of-use, by students and instructors alike.
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What’s NEW about the 4th edition of
Chapter 1New Real-World Focus examples, including surveys of current practice
Update of section on ethics for new IMA Code of Professional Conduct
New self-study question, and new exercises and problems focusing on strategy and on ethics
Chapter 2New Real-World Focus examples, including surveys of current practice
Enhanced material on implementing the balanced scorecard (BSC)
New exercises and problems with an emphasis on strategy and the balanced scorecard
Chapter 3Clarification of the discussion on cost drivers
Coverage of risk preferences removed from Chapter 3 and now enhanced in Chapter 17
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New Real-World Focus examples, including an extensive example of cost terms used in agriculture
New discussion of the cost of capacity
New exercises and problems
Chapter 4Coverage of departmental overhead rates moved from Chapter 5; related exercise and problem material added on departmental overhead rates
Clarification of accounting for normal spoilage with the addition of an example in the text
New Real-World Focus examples
New exercises and problems with a focus on service industries
Chapter 5 Significant revision to shorten
and focus this chapter; customer profitability analysis has been shortened and is now more focused
Coverage of departmental overhead rates is moved to Chapter 4; learning objectives are condensed and focused;
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the strategic role of ABC/M is enhanced and moved to the front of the chapter
All new illustrations in the text, including examples in service and governmental organizations
New exhibits to clarify the two-stage procedure under volume-based and activity-based costing
Several new Real-World Focus examples, including surveys of current practice
New coverage of the cost of capacity and the role of ABC costing in managing the cost of capacity
Several new exercises and problems, with a focus on the cost of capacity
New exercises and problems that include resource-consumption as well as activity-consumption cost drivers
New coverage of time-driven ABC costing
New coverage of multiple-activity ABC costing
New exercises and problems focusing on strategy, the cost of capacity, resource consumption cost drivers, and ethics
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Chapter 6New discussion of simple vs. multiple linear regression
New coverage of time-series vs. cross-sectional regression
Several new Real-World Focus examples
Expanded coverage of the learning curve, with discussion of the general learning model
New exercises and problems with a focus on interpreting regression results, including those from cross-sectional regression analysis
Chapter 7Notation is clarified and changed to closely correspond with symbols used in Chapter 6
New Real-World Focus examples
New problems and examples
Expanded coverage of Excel’s Goal Seek option for conducting sensitivity analysis
Clarification of the coverage of activity-based CVP and multiple-product CVP
Chapter 8Completely new set of Real-World Focus examples
Additional end-of-chapter material dealing with ethical considerations, budgeting for not-for-profit organizations, and sensitivity analysis
Explicit linkage to financial accounting (accounting for sales discounts)
Inclusion of additional Excel-based assignments
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Chapter 9Updated Real-World Focus examples
New exercises and problems with a focus on strategy and on applications in the service industries
Chapter 10New coverage of quality function deployment (QFD), including several illustrations
New and updated Real-World Focus examples
New exercises and problems with a focus on strategy and on service industries
Additional coverage of Takt time with a new illustration and problem material
Chapter 11Additional coverage of backflush costing with a new illustration and problem material
New problem material with a focus on service industries
Chapter 12New Real-World Focus examples
New problems
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Chapter 13Expanded introductory discussion of control systems in general and operational control systems in particular
Expanded discussion of the difference between standard costs and a standard cost system
Presentation of a general model for analyzing variable cost variances (Exhibit 13.7)
Broader mix of end-of-chapter assignment material (including additional Excel-based assignments, ethics, and behavioral considerations)
Movement of journal-entry material to an appendix
Chapter 14New discussion of the difference between the product-costing and control purposes of standard costs for factory overhead
Expanded discussion of the variance-disposition question
New diagrammatical approach for overhead variance analysis (Exhibits 14.4 and 14.5), and associated end-of-chapter assignment material
New alternative diagrammatical approach for overhead variance analysis (Exhibit 14.18)
Expanded set of Excel-based end-of-chapter assignment material
Significant expansion of Real-World Focus items
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Cost Management?
David E. Stout has joined the Blocher author team for the fourth edition. Dr. Stout brings years of teaching experience at Rider University, Villanova University, and most recently Youngstown State University, to this new edition. David earned his PhD degree (1982) from the University of Pittsburgh and teaches primarily in the cost/managerial accounting area.
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xii
Chapter 15Significant revision including new material and a new focus on the flexible budget; the chapter is now integrated into the flexible budget concept used in the prior two chapters, and there is a new emphasis on the strategic role of the analysis of sales performance and productivity
The coverage of strategic profitability analysis has been removed and replaced by a framework that is consistent with the flexible budget approach
Duplication between Chapters 15 and 13 removed for the new edition
New Real-World Focus examples
New end-of-chapter exercise and problem material with a focus on the application of the flexible budget concept in the analysis of productivity and sales performance
Chapter 16Development of a comprehensive framework (Exhibit 16.3) for managing and controlling quality, which is used to anchor the discussion of all topics covered in the chapter
New discussion regarding the role of management accounting in the management and control of quality
Expanded discussion of nonfinancial performance indicators
New discussion of Six Sigma, including implementation issues and the application of Six Sigma to the accounting/finance function
Many new Real-World Focus items
New discussion of the application of COQ to environmental quality
Greatly expanded mix of end-of-chapter assignment material
Repositioning of Taguchi loss function analysis to an appendix
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Chapter 17Coverage of risk preferences repositioned to this chapter from Chapter 3; this material, including related assignment material, has been updated and enhanced
New and updated Real-World Focus examples, including surveys from practice
New coverage of the role of strategy in the determination of the cost, profit, or revenue SBU, with new exhibit to illustrate the differences across these responsibility units
Extended coverage of the implementation of the balanced scorecard (BSC) for performance measurement
Chapter 18New coverage and illustration of the relationship between the components of return on assets: return on sales and asset turnover
New Real-World Focus examples
New exercises and problems with a focus on economic profit, residual income, and EVA®
New coverage of intangible assets and the use of ROA for innovative companies
Chapter 19New and updated Real-World Focus examples, including surveys from practice
Updated discussion of reporting requirements for stock options
Significant revision of the coverage on business valuation; new focus on determining the market value of equity
Expanded coverage of the discounted cash flow method (DCF) for valuing a firm
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Chapter 20Expanded discussion of the strategic role of capital budgeting
New discussion of the role of the management accountant in the capital budgeting process
Reference to the analytic hierarchy process (AHP) in conjunction with the capital budgeting process
Consistent with the revisions in Chapter 19, reorientation of material to provide greater focus on discounted cash flow (DCF) decision models
Expanded discussion of the calculation of the weighted-average cost of capital (WACC)
Many new Real-World Focus examples pertaining to the capital budgeting process
New discussion regarding sensitivity analysis
Integration of Excel-based financial formulas for solving capital budgeting problems
Advanced issues in capital budgeting analysis are repositioned to an appendix
Expanded discussion of behavioral considerations associated with the capital-budgeting process
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For Instructors…
For Students…
SupplementsInstructor’s Resource CD-ROM (ISBN 0073128163): Contains all essential course
supplements such as the Instructor’s Resource Manual, Solutions Manual, Test Bank Word
Files, Diploma Test Bank, PowerPoint® Presentations, and Excel Solutions Manual. All
instructor supplements are prepared by the authors.
Online Learning Center: www.mhhe.com/blocher4e. The Instructor Edition of the Cost Management: A Strategic Emphasis, 4e OLC
is password-protected and another convenient place for instructors to access
course supplements. Resources for professors include: the Instructor and Student
Solutions Manual, transparency masters, teaching notes for the casebook, links to
professional resources, sample syllabi, text updates, solutions to the Instructor and
Student Excel Spreadsheets, and solutions to Internet exercises.
Cases and Readings for use with Cost Management: A Strategic Emphasis, 4e (ISBN 0073128198): This manual contains an extensive set of longer cases
covering a variety of important topics. These case scenarios put students in situations that
allow them to think strategically and to apply concepts they’ve learned in the course. Key
readings have been chosen to give students more background into the evolution of strategic
cost management topics.
Study Guide (ISBN 0073128171): Prepared by Roger Doost (Clemson University),
the Study Guide reviews the highlights of each chapter in Cost Management: A Strategic
Emphasis, 4e and includes a variety of self-study questions for student review. Every chapter
includes short-answer questions organized by learning objective, multiple-choice questions,
and thorough exercises. Suggested answers to all questions and exercises are included.
Online Learning Center: www.mhhe.com/blocher4e. The Student
Edition of the Cost Management: A Strategic Emphasis, 4e OLC contains many tools
designed to help students study including: check fi gures, text updates, links to professional
resources, chapter overviews, chapter objectives, multiple-choice quizzes, fl ashcard key term
review, Internet exercises, Excel spreadsheets with data only (for use by students with Excel
assignments), and PowerPoint® presentations.
SAS Software: SAS’s Activity-Based Costing (ABC) software is used worldwide for
performance management functions and analysis. Cost Management fully incorporates SAS
Software in its case material to prepare students for calculating ABC costs, creating cost driver
assignments, and organizing cost information in an electronic environment. Visit the Blocher
OLC today to learn more!
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xiv
Acknowledgments
Our Sincerest Thanks . . . In writing this book, we were fortunate to have received extensive feedback from a number of accounting educators. We want to thank our colleagues for their careful and complete review of our work. The comments that we received were invaluable in helping us to shape the manu-script. We believe that this collaborative development process helped us to create a text that will truly meet the needs of today’s students and instructors. We are sincerely grateful to the following individuals for their participation in the process:
Reviewers for 4e:
Stephen Makar, University of Wisconsin–Oshkosh
Michael Flores, Wichita State University
Jay D. Forsyth, Central Washington University
Jay Holmen, University of Wisconsin–Eau Claire
Jennifer Niece, Assumption College
David R. Honodel, University of Denver
Dennis Caplan, Oregon State University
David Eichelberger, Austin Peay State University
Jerry W. Ferry, University of North Alabama
Laurie B. McWhorter, Mississippi State University
Randall E. LaSalle, West Chester University of Pennsylvania
Vidya N. Awasthi, Seattle University
Bambi Hora, University of Central Oklahoma
Jerry Thorne, North Carolina A&T State University
Olen L. Greer, Southwest Missouri State University
Marvin L. Bouillon, Iowa State University
Bea Chiang, The College of New Jersey
Alan B. Czyzewski, Indiana State University
Judith A. Harris, Nova Southeastern University
Aleecia Hibbets, University of Louisiana–Monroe
Sanford R. Kahn, University of Cincinnati
Mehmet C. Kocakulah, University of Southern Indiana
Laura Jean Kreissl, University of Wisconsin–Parkside
Dan Law, Gonzaga University
Brian L. McGuire, University of Southern Alabama
Yaw M. Mensah, Rutgers University
Kenneth P. Sinclair, Lehigh University
Larry N. Killough, Virginia Polytechnic Institute and State University
Sandra S. Lang, McKendree College
Mike Grayson, Jackson State University
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Acknowledgments xv
Brian L. McGuire, University of Southern Indiana
Cheryl E. Mitchem, Virginia State University
Margaret O’Reilly-Allen, Rider University
Chei M. Paik, George Washington University
Hugh Pforsich, University of Idaho
Shirley Polejewski, University of St. Thomas
Jenice Prather-Kinsey, University of Missouri–Columbia
Dennis Shanholtzer, Metropolitan State University
John L. Stancil, Florida Southern College
Ronald A. Stunda, Birmingham-Southern College
Previous Edition Reviewers:
K.R. Balachandran, New York University
Mohamed E. Bayou, School of Management–University of Michigan–Dearborn
Wayne Bremser, Villanova University
Robert J. DePasquale, Saint Vincent College
Robert W. Duron, Chadron State College
Donald C. Gribbin, Southern Illinois University
Linda Holmes, University of Wisconsin–Whitewater
Norma C. Holter, Towson University
Paul Juras, Wake Forest University
We also want to recognize the special efforts of:
Daniel Flaningan
Keith Folken
Kristin Hawkins
Taylor Henry
Jessie Kinsley
Andrew Stulce
Finally, we are most appreciative of the outstanding assistance and support provided by the professionals of McGraw-Hill/Irwin: Stewart Mattson, our editorial director, and Tim Vertovec, Executive Editor, for their guidance; our developmental editor, Daryl Horrocks, for his invaluable suggestions; Krista Bettino, our marketing manager, for her signifi cant promo-tional efforts; Bruce Gin, our project manager, for his attention to detail; Cara David, for the outstanding presentation of the text; Ira Roberts, our supplements coordinator, for his timeli-ness and accuracy in delivering the support material; and Victor Chiu, our media producer, and Matthew Perry, our media project manager, for their technical expertise in delivering our multimedia material. An added thanks to Beth Woods and Alice Sineath for their signifi cant contributions to the accuracy of our text.
Ed Blocher
David E. Stout
Gary Cokins
Kung Chen
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xvi
Brief Contents
PART ONE Introduction to Cost Management 2
1 Cost Management and Strategy: An Overview 2
2 Implementing Strategy: The Balanced Scorecard and the Value Chain 30
3 Basic Cost Management Concepts 54
4 Job Costing 84
5 Activity-Based Costing and Management 120
PART TWO Planning and Decision Making 170
6 Cost Estimation 170
7 Cost-Volume-Profi t Analysis 218
8 Strategy and the Master Budget 254
9 Decision Making with Relevant Costs and a Strategic Emphasis 316
10 Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing 360
PART THREE Process Costing and Cost Allocation 404
11 Process Costing 404
12 Cost Allocation: Service Departments and Joint Product Costs 454
PART FOUR Operational Control 494
13 The Flexible Budget and Standard Costing: Direct Materials and Direct Labor 494
14 The Flexible Budget: Factory Overhead 550
15 The Flexible Budget: Further Analysis of Productivity and Sales 610
16 The Management and Control of Quality 648
PART FIVE Management Control 698
17 Management Control and Strategic Performance Measurement 698
18 Strategic Investment Units and Transfer Pricing 742
PART SIX Advanced Topics in Cost Management 784
19 Management Compensation, Business Analysis, and Business Valuation 784
20 Capital Budgeting 818
PRESENT VALUE TABLES 870
GLOSSARY 872
INDEX 882
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Contents
PART ONE INTRODUCTION TO COST MANAGEMENT 2
Chapter 1 Cost Management and Strategy: An Overview 2
The Uses of Cost Management 3 The Four Functions of Management 4 Strategic Management and Strategic Cost Management 6 Types of Organizations 6
The Contemporary Business Environment 7 The Global Business Environment 7 Manufacturing Technologies 8 The New Economy: Use of Information Technology, the Internet, and E-Commerce 8 Focus on the Customer 8 Management Organization 9 Social, Political, and Cultural Considerations 9
The Strategic Focus of Cost Management 10 Contemporary Management Techniques 10
Benchmarking 10 Total Quality Management 11 Business Process Improvement 11 Activity-Based Costing and Management 11 Reengineering 11 The Theory of Constraints 11 Mass Customization 12 Target Costing 12 Life-Cycle Costing 12 The Value Chain 12 The Balanced Scorecard 12
How a Firm Succeeds: The Competitive Strategy 13 Strategic Measures of Success 14
Developing a Competitive Strategy: Strategic Positioning 15
Cost Leadership 15 Differentiation 16 Other Strategic Issues 16
The Professional Environment of Cost Management 17 Professional Organizations 17 Professional Certifi cations 19 Professional Ethics 20
Summary 21 Appendix A: More about Strategy 22 Key Terms 23 Comments on Cost Management in Action 23 Self-Study Problem 24 Questions 24 Brief Exercises 25 Exercises 25
Problems 26 Solution to Self-Study Problem 29
Chapter 2 Implementing Strategy: The Balanced Scorecard and the Value Chain 30
Strengths-Weaknesses-Opportunities-Threats (SWOT) Analysis 31 Execution 33Value-Chain Analysis 35
Value-Chain Analysis in Computer Manufacturing 37 The Balanced Scorecard 38
The Balanced Scorecard Refl ects Strategy 39 The Strategy Map 40 Expanding the Balanced Scorecard Sustainability 42
Summary 43 Key Terms 43 Comments on Cost Management in Action 43 Self-Study Problems 44 Questions 44 Brief Exercises 45 Exercises 45 Problems 45 Solutions to Self-Study Problems 52
Chapter 3 Basic Cost Management Concepts 54
Cost Drivers, Cost Pools, and Cost Objects 55 Cost Assignment and Cost Allocation: Direct and Indirect Costs 55 Cost Drivers and Cost Behavior 58 Activity-Based Cost Drivers 58 Volume-Based Cost Drivers 59 Structural and Executional Cost Drivers 63
Cost Concepts for Product and Service Costing 64 Cost Accounting for Products and Services 64 Product Costs and Period Costs 64 Manufacturing, Merchandising, and Service Costing 65
Cost Concepts for Planning and Decision Making 68 Relevant Cost 68 Attributes of Cost Information for Decision Making 69
Cost Concepts for Management and Operational Control 70
Controllability 70 Summary 70 Key Terms 71 Comments on Cost Management in Action 71 Self-Study Problem 71 Questions 72 Brief Exercises 72 Exercises 73 xvii
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xviii Contents
Problems 78 Solution to Self-Study Problem 82
Chapter 4 Job Costing 84
Product Costing Systems 84 Cost Accumulation: Job or Process Costing? 85 Cost Measurement: Actual, Normal, or Standard Costing 85 Overhead Assignment under Normal Costing: Volume-Based or Activity-Based? 85
The Strategic Role of Product Costing 86 Job Costing: The Cost Flows 86
Direct Materials Costs 87 Direct Labor Costs 89 Factory Overhead Costs 91 Actual Costing 91 Normal Costing 91
The Application of Factory Overhead in Normal Costing 93
Cost Drivers for Factory Overhead Application 93 Applying Factory Overhead Costs 93 Departmental Overhead Rates 94 Disposition of Underapplied and Overapplied Overhead 96
Job Costing in Service Industries 97 Operation Costing 98 Summary 100 Appendix A: Spoilage, Rework, and Scrap in Job Costing 101 Key Terms 103 Comments on Cost Management in Action 103 Self-Study Problem 103 Questions 104 Brief Exercises 104 Exercises 105 Problems 108 Solution to Self-Study Problem 118
Chapter 5 Activity-Based Costing and Management 120
The Strategic Role of Activity-Based Costing 120 Role of Volume-Based Costing 121 Activity-Based Costing 122
Resources, Activities, Resource Consumption Cost Drivers, and Activity Consumption Cost Drivers 122 What Is Activity-Based Costing? 122 The Two-Stage Cost Assignment Procedure 123
Steps in Developing an Activity-Based Costing System 124 Step 1: Identify Resource Costs and Activities 124 Step 2: Assign Resource Costs to Activities 125 Step 3: Assign Activity Costs to Cost Objects 126
Benefi ts and Limitations of Activity-Based Costing 126 Benefi ts 126 Limitations 127
A Comparison of Volume-Based and Activity-Based Costing 128
Volume-Based Costing 128 Activity-Based Costing 129
Activity-Based Management 130 What Is Activity-Based Management? 130 Activity Analysis 131 Value-Added Analysis 131
Activity-Based Costing/Management (ABC/M) Applications 133
ABC/M in Manufacturing: Industrial Air Conditioner Units 133 ABC/M Application in the Service Industry: A Retirement and Assisted Living Community 135 ABC/M Applications in Government 136
Customer Profi tability Analysis 138 Customer Cost Analysis 139 Customer Profi tability Analysis 140 Customer Value Assessment 141
Implementation Issues 142 Multiple-Stage Activity-Based Costing 143 Time-Driven Activity-Based Costing 143
Summary 144 Key Terms 144 Comments on Cost Management in Action 145 Self-Study Problem 145 Questions 146 Brief Exercises 146 Exercises 147 Problems 153 Solution to Self-Study Problem 167
PART TWO PLANNING AND DECISION MAKING 170
Chapter 6 Cost Estimation 170
Strategic Role of Cost Estimation 170 Using Cost Estimation to Predict Future Costs 171 Using Cost Estimation to Identify Cost Drivers 171
Six Steps of Cost Estimation 172 Step 1: Defi ne the Cost Object to Be Estimated 172 Step 2: Determine the Cost Drivers 172 Step 3: Collect Consistent and Accurate Data 172 Step 4: Graph the Data 172 Step 5: Select and Employ the Estimation Method 173 Step 6: Assess the Accuracy of the Cost Estimation 173
Cost Estimation Methods 173 An Illustration of Cost Estimation 173 High-Low Method 173 Work Measurement 176 Regression Analysis 176 Using Spreadsheet Software for Regression Analysis 182
Data Requirements and Implementation Problems 183 Data Accuracy 183 Selecting the Time Period 183 Nonlinearity Problems 184
Summary 185 Appendix A: Learning Curve Analysis 186 Appendix B: Regression Analysis 189 Key Terms 195
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Contents xix
Comments on Cost Management in Action 195 Self-Study Problem 196 Questions 197 Brief Exercises 198 Exercises 199 Problems 202 Solutions to Self-Study Problems 214
Chapter 7 Cost-Volume-Profi t Analysis 218
Cost-Volume-Profi t Analysis 218 Contribution Margin and Contribution Income Statement 219
Strategic Role of CVP Analysis 220 CVP Analysis for Breakeven Planning 222
Equation Method: For Breakeven in Units 222 Equation Method: For Breakeven in Dollars 222 Contribution Margin Method 223
CVP Analysis for Profi t Planning 225 Revenue Planning 225 Cost Planning 225 Including Income Taxes in CVP Analysis 228
CVP Analysis for Activity-Based Costing 229 Sensitivity Analysis of CVP Results 231
What-If Analysis of Sales: Contribution Margin and Contribution Margin Ratio 231 Margin of Safety 231 Operating Leverage 232
CVP Analysis with Two or More Products 234 CVP Analysis for Not-for-Profi t Organizations 236 Assumptions and Limitations of CVP Analysis 236
Linearity and the Relevant Range 236 Identifying Fixed and Variable Costs for CVP Analysis 236
Summary 238 Key Terms 239 Comments on Cost Management in Action 239 Self-Study Problem 239 Questions 239 Brief Exercises 240 Exercises 240 Problems 242 Solution to Self-Study Problem 253
Chapter 8 Strategy and the Master Budget 254
Role of Budgets 255 Strategy, the Long-Term Plan, and the Master Budget 256
Importance of Strategy in Budgeting 256 Formulation of Strategy 258 Strategic Goals and Long-Term Objectives 258 Short-Term Objectives and the Master Budget 258
Budgeting Process 260 Budget Committee 260 Budget Period 261 Budget Guidelines 262 Initial Budget Proposal 262 Negotiation, Review, and Approval 262 Revision 263
Master Budget 263 Sales Budget 263 Manufacturing Budgets 265 Merchandise Purchases Budget 269 Selling and General Administrative Expense Budget 271 Cash Receipts (Collections) Budget 272 Cash Budget 272 Budgeted Income Statement 274 Budgeted Balance Sheet 274
Budgeting in Service Companies and International Firms, and Not-for-Profi t Organizations 276
Budgeting in Service Industries 276 Budgeting in Not-for-Profi t Organizations 278 Budgeting in International Settings 278
Alternative Budgeting Approaches 279 Zero-Base Budgeting (ZBB) 279 Activity-Based Budgeting (ABB) 280 Kaizen (Continuous Improvement) Budgeting 281
Computer Software in Budgeting and Planning 282 Ethical and Behavioral Issues in Budgeting 284
Ethics in Budgeting 284 Goal Congruence 284 Diffi culty Level of the Budget Target 285 Authoritative or Participative Budgeting? 286 Role of the Budget Department or Controller 286
Summary 287 Key Terms 287 Comments on Cost Management in Action 287 Self-Study Problems 288 Questions 289 Brief Exercises 290 Exercises 291 Problems 299 Solutions to Self-Study Problems 313
Chapter 9 Decision Making with Relevant Costs and a Strategic Emphasis 316
The Decision-Making Process 317 Relevant Cost Analysis 318
Relevant Cost Information 318 Batch-Level Cost Drivers 319 Fixed Costs and Depreciation 320 Other Relevant Information: Opportunity Costs 320
Strategic Cost Analysis 321 Special-Order Decisions 322
Cost Analysis 322 Strategic Analysis 323 Is TTS Now Operating at Full Capacity? 323 Excessive Relevant Cost Pricing 324 Other Important Factors 325
Make, Lease, or Buy Decision 325 Cost Analysis 325 Strategic Analysis 327
Sell Before or After Additional Processing 327 Cost Analysis 327 Strategic Analysis 328
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xx Contents
Profi tability Analysis 329 Profi tability Analysis: Keep or Drop a Product Line 329 Strategic Analysis 330 Profi tability Analysis: Evaluating Programs 331 Profi tability Analysis: Service and Not-for-Profi t Organizations 331
Multiple Products and Limited Resources 332 Case 1: One Production Constraint 332 Case 2: Two or More Production Constraints 333
Behavioral and Implementation Issues 335 Consideration of Strategic Objectives 335 Predatory Pricing 335 Replacement of Variable Costs with Fixed Costs 336 Proper Identifi cation of Relevant Factors 336
Summary 337 Appendix A: Linear Programming and the Product Mix Decision 337 Key Terms 340 Comments on Cost Management in Action 340 Self-Study Problems 340 Questions 341 Brief Exercises 341 Exercises 342 Problems 346 Solutions to Self-Study Problems 358
Chapter 10 Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing 360
Target Costing 362 Value Engineering 363 Target Costing and Kaizen 365 An Illustration: Target Costing in Health Product Manufacturing 366 An Illustration Using Quality Function Deployment (QFD) 367 Benefi ts of Target Costing 368
The Theory of Constraints 369 The Use of the Theory of Constraints Analysis in Health Product Manufacturing 370 Steps in the Theory of Constraints Analysis 370 Theory of Constraints Reports 375 Activity-Based Costing and the Theory of Constraints 375
Life-Cycle Costing 376 The Importance of Design 377 The Use of Life-Cycle Costing in a Software Firm 378
Strategic Pricing Using the Product Life Cycle 379 Pricing Using the Cost Life Cycle 379 Strategic Pricing for Phases of the Sales Life Cycle 381 The Use of the Sales Life Cycle in Computer Manufacturing 381
Summary 382 Appendix A: Using the Flow Diagram to Identify Constraints 382 Key Terms 384 Comments on Cost Management in Action 384 Self-Study Problem 384
Questions 385 Brief Exercises 385 Exercises 386 Problems 391 Solution to Self-Study Problem 401
PART THREE PROCESS COSTING AND COST ALLOCATION 404
Chapter 11 Process Costing 404
Characteristics of Process Costing Systems 405 Equivalent Units 405 Flow of Costs in Process Costing 406 Steps in Process Costing 407 Process Costing Methods 408
Illustration of Process Costing 408 Weighted-Average Method 409 First-In, First-Out (FIFO) Method 412
Comparison of Weighted-Average and FIFO Methods 419 Process Costing with Multiple Departments 419
Transferred-In Costs 420 Weighted-Average Method 420 The FIFO Method 422
Journal Entries for Process Costing 425 Implementation and Enhancement of Process Costing 426
Activity-Based Costing and the Theory of Constraints 426 Just-in-Time Systems and Backfl ush Costing 427
Summary 428 Appendix A: Spoilage in Process Costing 428 Key Terms 432 Comments on Cost Management in Action 432 Self-Study Problems 432 Questions 433 Brief Exercises 434 Exercises 434 Problems 437 Solutions to Self-Study Problems 448
Chapter 12 Cost Allocation: Service Departments and Joint Product Costs 454
The Strategic Role of Cost Allocation 455 The Ethical Issues of Cost Allocation 456 Cost Allocation to Service and Production Departments 456
Departmental Approach 457 Cost Allocation in Service Industries 468 Joint Product Costing 470
Methods for Allocating Joint Costs to Joint Products 471 Summary 475 Appendix A: By-Product Costing 475 Key Terms 478 Comments on Cost Management in Action 478 Self-Study Problem 478 Questions 478
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Contents xxi
Brief Exercises 479 Exercises 480 Problems 481 Solution to Self-Study Problem 492
PART FOUR OPERATIONAL CONTROL 494
Chapter 13 The Flexible Budget and Standard Costing: Direct Materials and Direct Labor 494
Management Accounting and Control Systems 495 Evaluating Operating Performance 495
Effectiveness 495 Standard Costs 497
Standard Costs versus a Standard Cost System 497 Types of Standards 498 Selection of Standards 499 Sources of Standards 499 Standard-Setting Procedures 501 Establishing Standard Costs 501 Standard Cost Sheet 502
Flexible Budgets and Operational Control 504 The Flexible Budget 504 Assessing Effi ciency 505 Breakdown of the Total Flexible Budget Variance 507 Selling Price Variance 508 Variable Cost Flexible Budget Variances 508 Further Analysis of the Total Variable Cost Flexible Budget Variance 509
General Model for Analysis of Variable Cost Variances 509
Direct Materials Variances 510 Direct Labor Variances 513 Timing of Variance Recognition 515 Effect of the New Manufacturing Technology 516
Behavioral and Implementation Issues 516 Summary 517 Appendix A: Recording Cost Flows and Variances in a Standard Cost System 519 Key Terms 522 Comments on Cost Management in Action 522 Self-Study Problems 523 Questions 524 Brief Exercises 525 Exercises 526 Problems 534 Solutions to Self-Study Problems 547
Chapter 14 The Flexible Budget: Factory Overhead 550
Standard Overhead Costs: Planning versus Control 551 Variance Analysis for Factory Overhead Costs 552
Variable Overhead Cost Analysis 552 Interpretation and Implications of Variable Overhead Variances 554
Fixed Overhead Cost Analysis 555 Interpretation of Fixed Factory Overhead Variances 558 Alternative Analyses of Factory Overhead Variances 559 Summary of Factory Overhead Variances 561
Recording Standard Factory Overhead Costs 562 Journal Entries and Variances for Factory Overhead Costs 562 Variance Disposition 563
Standard Costs in Service Organizations 565 Overhead Variances in ABC Systems 568
ABC-Based Flexible Budgets for Control 569 Investigation of Variances 572
Type of Standard 572 Expectations of the Organization 572 Magnitude, Pattern, and Impact of a Variance 572 Causes and Controllability 573 Company Practices 576
Summary 576 Appendix A: Variance Investigation Decisions Under Uncertainty 578 Key Terms 580 Comments on Cost Management in Action 580 Self-Study Problems 581 Questions 582 Brief Exercises 583 Exercises 583 Problems 593 Solutions to Self-Study Problems 606
Chapter 15 The Flexible Budget: Further Analysis of Productivity and Sales 610
The Strategic Role of the Flexible Budget in Analyzing Sales and Productivity 610 Analyzing Productivity 612
Partial Productivity 613 Total Productivity 618
Analyzing Sales: Comparison with the Master Budget 619
Sales Volume Variance Decomposed: Sales Quantity and Sales Mix Variances 620 Sales Quantity Variance Decomposed: Market Size and Market Share Variances 624
Analyzing Sales: Comparison with Prior Year Results 627
Analysis of Selling Price and Volume Variances 628 Analysis of Mix and Quantity Variances 629 Analysis of Variable Cost Variances 629
Summary 630 Key Terms 631 Comments on Cost Management in Action 631 Self-Study Problems 631 Questions 632 Brief Exercises 633 Exercises 634 Problems 636 Solutions to Self-Study Problems 634
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xxii Contents
Chapter 16 The Management and Control of Quality 648
The Strategic Importance of Quality 649 Baldrige Quality Award 649 ISO 9000 and ISO 14000 649 Quality and Profi tability: Conceptual Linkage 650 Empirical Evidence—Does TQM Matter? 651
Accounting’s Role in the Management and Control of Quality 652
Chapter Preview 652 Total Quality Management (TQM) 652
The Meaning of Quality 652 Characteristics of Total Quality Management 654 The Need for a New Accounting System 654
Comprehensive Framework for Managing and Controlling Quality 654
Knowledge of Business Processes 654 Role of the Customer 655 Financial Component 656 Nonfi nancial Performance Indicators 656 Feedback Loops 656 Relevant Cost Analysis 656 Link to Operations Management 656 Breadth of the System 656
Setting Quality-Related Expectations 657 Setting Quality Expectations: A Six Sigma Approach 657 Setting Quality Expectations: Goalpost versus Absolute Conformance Standards 659 Goalpost Conformance 659 Absolute Quality Conformance 660 Goalpost or Absolute Conformance? 660
Financial Measures and Costs of Quality 661 Relevant Cost Analysis 661 Cost of Quality (COQ) Reporting 662 Quality Cost Reports 664 Data Defi nition, Sources, and Collection 664 Report Format 665 Illustration of a Cost of Quality Report 665 COQ and Activity-Based Costing (ABC) 666
Nonfi nancial Quality Indicators 666 Internal Nonfi nancial Quality Metrics 666 External (Customer Satisfaction) Quality Metrics 667 Role of Nonfi nancial Performance Measures 667
Detecting and Correcting Poor Quality 668 Detecting Poor Quality 668 Taking Corrective Action 670
Summary 673 Appendix A: Taguchi Quality Loss Functions 673 Key Terms 676 Comments on Cost Management in Action 677 Self-Study Problems 677 Questions 678 Brief Exercises 679 Exercises 680
Problems 687 Solutions to Self-Study Problems 696
PART FIVE MANAGEMENT CONTROL 698
Chapter 17 Management Control and Strategic Performance Measurement 698
Performance Evaluation and Control 699 Operational Control versus Management Control 699 Objectives of Management Control 699 Employment Contracts 700
Design of Management Control Systems for Motivation and Evaluation 702
Informal Control Systems 703 Formal Control Systems 704
Strategic Performance Measurement 704 Decentralization 704 Types of Strategic Business Units 705 The Balanced Scorecard 706
Cost Strategic Business Units 706 Strategic Issues Related to Implementing Cost SBUs 706 Implementing Cost SBUs in Departments 708 Outsourcing Cost SBUs 710 Cost Allocation 710
Revenue Strategic Business Units 711 Profi t Strategic Business Units 712
Strategic Role of Profi t SBUs 712 The Contribution Income Statement 713 Variable Costing versus Full Costing 714
Strategic Performance Measurement and the Balanced Scorecard 716 Management Control in Service Firms and Not-for-Profi t Organizations 720 Summary 722 Key Terms 722 Comments on Cost Management in Action 722 Self-Study Problem 723 Questions 723 Brief Exercises 724 Exercises 725 Problems 727 Solution to Self-Study Problem 740
Chapter 18 Strategic Investment Units and Transfer Pricing 742
Part One: Strategic Investment Units 743 The Strategic Role of Investment Units 743 Return on Investment 744
ROI Equals Return on Sales Times Asset Turnover 744 Illustration of Evaluation Using Return on Investment 744 Use of Return on Investment 747 Strategic Issues in Using Return on Investment 751
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Contents xxiii
Residual Income 753 Limitations of Residual Income 754
Economic Value Added 755 Using Average Total Assets 755 Part Two: Transfer Pricing 756 When Is Transfer Pricing Important? 756 Objectives of Transfer Pricing 757
International Transfer Pricing Objectives 757 Transfer Pricing Methods 758
Choosing the Right Transfer Pricing Method 758 International Tax Issues in Transfer Pricing 761
The Arm’s-Length Standard 761 Advance Pricing Agreements 762
Summary 763 Key Terms 763 Comments on Cost Management in Action 763 Self-Study Problems 764 Questions 764 Brief Exercises 764 Exercises 765 Problems 771 Solutions to Self-Study Problems 782
PART SIX ADVANCED TOPICS IN COST MANAGEMENT 784
Chapter 19 Management Compensation, Business Analysis, and Business Valuation 784
Part One: Management Compensation 784 Types of Management Compensation 785 Strategic Role and Objectives of Management Compensation 786
Design the Compensation Plan for Existing Strategic Conditions 786 Risk Aversion and Management Compensation 786 Ethical Issues 787 Objectives of Management Compensation 787
Bonus Plans 788 Bases for Bonus Compensation 788 Bonus Compensation Pools 790 Bonus Payment Options 790
Tax Planning and Financial Reporting 792 Management Compensation in Service Firms 793 Part Two: Business Analysis and Business Valuation 794 Business Analysis 795
The Balanced Scorecard 795 Financial Ratio Analysis 795
Business Valuation 798 The Discounted Cash Flow Method 798 Multiples-Based Valuation 800 Enterprise Value 800
Summary 801 Key Terms 801 Comments on Cost Management in Action 801 Self-Study Problems 802 Questions 802 Brief Exercises 803 Exercises 803 Problems 807 Solutions to Self-Study Problems 816
Chapter 20 Capital Budgeting 818
Strategy and the Capital Budgeting Process 819 Underlying Nature of Capital Expenditures 819 Organizational Strategy and the Nature of Capital Investment Analysis 819 Effect of Capital Expenditures on Strategic Cost Drivers 820 Chapter Overview—Where Are We Headed? 821
The Role of Accounting in the Capital Budgeting Process 821
Linkage to Master Budget 821 Linkage to the Balanced Scorecard (BSC) 821 Generation of Relevant Financial Data for Decision-Making Purposes 823 Conducting Post-Audits 823
Identifi cation of Relevant Cash-Flow Data for Capital Expenditure Analysis 824
Why Focus on Cash Flows? 824 Cash Flows—A Framework for Analysis 825 Sample Data Set: Mendoza Company—Equipment Replacement Decision 825 Determining After-Tax Cash Flows for Capital Investment Analysis 827 Recap—Cash Flow Information for the Mendoza Company Investment Proposal 832
Discounted Cash Flow (DCF) Capital Budgeting Decision Models 832
Types of Capital Budgeting Decision Models 832 DCF Models: Specifying the Discount Rate 832 Estimating the WACC 834 Net Present Value (NPV) Decision Model 836 Internal Rate of Return (IRR) Decision Model 837 Comparison of NPV and IRR Methods: Which to Use? 839
Sensitivity Analysis 839 What-If Analyses 839 Scenario Analysis 841 Monte Carlo Simulation 841
Other Capital Budgeting Decision Models 842 Payback Period 842 Accounting (Book) Rate of Return 844
Behavioral Issues in Capital Budgeting 846 Common Behavioral Problems: Cost Escalation, Incrementalism, and Uncertainty Intolerance 846 Goal-Congruency Issues 847 Addressing the Goal-Congruency Problem 847
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xxiv Contents
Summary 848 Appendix A: DCF Models: Some Advanced Considerations 848 Key Terms 851 Comments on Cost Management in Action 851 Self-Study Problem 852 Questions 853 Brief Exercises 854 Exercises 855
Problems 858 Solution to Self-Study Problem 866
Present Value Tables 870
Glossary 872
Index 882
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Cost Management
A Strategic Emphasis
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