Cost accounting a managerial emphasis 14e charles horngren

1 The Manager and ManagementStrategic Decisions and the Management Accountant 27 Value Chain and Supply Chain Analysis and Key Success Factors 27 Value-Chain Analysis 28 Supply-Chain Ana

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Srikant M DatarHarvard University

Madhav V RajanStanford University

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Authorised adaptation from the United States edition, entitled Cost Accounting: A Managerial Emphasis, 14 th edition, ISBN 978-0-13-210917-8 by Charles T Horngren, Srikant M Datar and Madhav V Rajan, published by Pearson Education, publishing as Prentice Hall © 2012.

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ISBN-13: 978-0-273-75387-2

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Brief Contents

7 Flexible Budgets, Direct-Cost Variances, and Management Control 248

9 Inventory Costing and Capacity Analysis 322

13 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 488

14 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis 524

16 Cost Allocation: Joint Products and Byproducts 598

19 Balanced Scorecard: Quality, Time, and the Theory of Constraints 692

20 Inventory Management, Just-in-Time, and Simplified Costing Methods 724

21 Capital Budgeting and Cost Analysis 760

22 Management Control Systems, Transfer Pricing, and Multinational Considerations 796

23 Performance Measurement, Compensation, and Multinational Considerations 828

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1 The Manager and Management

Strategic Decisions and the Management Accountant 27

Value Chain and Supply Chain Analysis and Key

Success Factors 27

Value-Chain Analysis 28

Supply-Chain Analysis 29

Key Success Factors 29

Decision Making, Planning, and Control: The Five-Step

Decision-Making Process 31

Key Management Accounting Guidelines 33

Cost-Benefit Approach 34

Behavioral and Technical Considerations 34

Different Costs for Different Purposes 34

Organization Structure and the Management

Accountant 35

Line and Staff Relationships 35

The Chief Financial Officer and the Controller 35

Professional Ethics 36

Institutional Support 36

Concepts in Action: Management Accounting Beyond

the Numbers

Typical Ethical Challenges 39

Problem for Self-Study 40 | Decision Points 40 | Terms to

Learn 41 | Assignment Material 41 | Questions 41 |

Exercises 42 | Problems 44 | Collaborative Learning

Problem 47

2 An Introduction to Cost Terms and

Purposes 48

GM Collapses Under the Weight of its Fixed Costs

Costs and Cost Terminology 49

Direct Costs and Indirect Costs 50

Challenges in Cost Allocation 51

Factors Affecting Direct/Indirect Cost

Classifications 51

Cost-Behavior Patterns: Variable Costs and Fixed

Costs 52

Cost Drivers 54

Concepts in Action: How Zipcar Helps Reduce

Twitter’s Transportation Costs

Relevant Range 55

Relationships of Types of Costs 56

Total Costs and Unit Costs 57Unit Costs 57

Use Unit Costs Cautiously 57Business Sectors, Types of Inventory, InventoriableCosts, and Period Costs 58

Manufacturing-, Merchandising-, and Service-SectorCompanies 58

Types of Inventory 59Commonly Used Classifications of ManufacturingCosts 59

Inventoriable Costs 59Period Costs 60Illustrating the Flow of Inventoriable Costs and PeriodCosts 61

Manufacturing-Sector Example 61Recap of Inventoriable Costs and Period Costs 64Prime Costs and Conversion Costs 65

Measuring Costs Requires Judgment 66Measuring Labor Costs 66

Overtime Premium and Idle Time 66Benefits of Defining Accounting Terms 67Different Meanings of Product Costs 67

A Framework for Cost Accounting and CostManagement 69

Calculating the Cost of Products, Services, and OtherCost Objects 69

Obtaining Information for Planning and Control andPerformance Evaluation 69

Analyzing the Relevant Information for MakingDecisions 69

3 Cost-Volume-Profit Analysis 84How the “The Biggest Rock Show Ever” Turned a Big Profit

Essentials of CVP Analysis 85Contribution Margins 86Expressing CVP Relationships 88Cost-Volume-Profit Assumptions 90Breakeven Point and Target Operating Income 90Breakeven Point 90

Target Operating Income 91Target Net Income and Income Taxes 92Using CVP Analysis for Decision Making 94Decision to Advertise 94

Decision to Reduce Selling Price 95

Contents

4

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CONTENTS 䊉 5

Sensitivity Analysis and Margin of Safety 95

Cost Planning and CVP 97

Alternative Fixed-Cost/Variable-Cost Structures 97

Operating Leverage 98

Effects of Sales Mix on Income 99

Concepts in Action: Choosing Plant Location

CVP Analysis in Service and Nonprofit

Organizations 102

Contribution Margin Versus Gross Margin 103

Problem for Self-Study 104 | Decision Points 105

APPENDIX:Decision Models and Uncertainty 106

Terms to Learn 108 | Assignment Material 109 |

Questions 109 | Exercises 109 | Problems 113 |

Collaborative Learning Problem 119

4 Job Costing 120

Job Costing and Nexamp’s Next Generation Energy and

Carbon Solutions

Building-Block Concepts of Costing Systems 121

Job-Costing and Process-Costing Systems 122

Job Costing: Evaluation and Implementation 124

Time Period Used to Compute Indirect-Cost

Rates 125

Normal Costing 126

General Approach to Job Costing 126

Concepts in Action: Job Costing on Cowboys Stadium

The Role of Technology 131

Underallocated and Overallocated Direct Costs 140

Adjusted Allocation-Rate Approach 140

Proration Approach 141

Write-Off to Cost of Goods Sold Approach 143

Choice Among Approaches 143

Variations from Normal Costing: A Service-Sector

Example 144

Broad Averaging and Its Consequences 161

Undercosting and Overcosting 162

Product-Cost Cross-Subsidization 162

Simple Costing System at Plastim Corporation 163Design, Manufacturing, and Distribution Processes 163

Simple Costing System Using a Single Indirect-CostPool 164

Applying the Five-Step Decision-Making Process atPlastim 166

Refining a Costing System 167Reasons for Refining a Costing System 167Guidelines for Refining a Costing System 168Activity-Based Costing Systems 168

Plastim’s ABC System 168Cost Hierarchies 171Implementing Activity-Based Costing 172Implementing ABC at Plastim 172Comparing Alternative Costing Systems 175Considerations in Implementing Activity-Based-Costing Systems 176

Concepts in Action: Successfully Championing ABC

Using ABC Systems for Improving Cost Managementand Profitability 178

Pricing and Product-Mix Decisions 178Cost Reduction and Process ImprovementDecisions 178

Design Decisions 179Planning and Managing Activities 180Activity-Based Costing and Department CostingSystems 180

ABC in Service and Merchandising Companies 181

Concepts in Action: Pincky: Capacity Costs and Time Driven Activity-Based Costing

6 Master Budget and Responsibility Accounting 204

“Scrimping” at the Ritz: Master Budgets

Budgets and the Budgeting Cycle 206Strategic Plans and Operating Plans 206Budgeting Cycle and Master Budget 207Advantages of Budgets 207

Coordination and Communication 207Framework for Judging Performance and FacilitatingLearning 208

Motivating Managers and Other Employees 208Challenges in Administering Budgets 209Developing an Operating Budget 209Time Coverage of Budgets 209Steps in Preparing an Operating Budget 210Financial Planning Models and Sensitivity Analysis 219

Concepts in Action: Web-Enabled Budgeting and Hendrick Motorsports

Budgeting and Responsibility Accounting 221

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Organization Structure and Responsibility 221

Feedback 222

Responsibility and Controllability 222

Human Aspects of Budgeting 223

Budgetary Slack 223

Kaizen Budgeting 225

Budgeting in Multinational Companies 225

APPENDIX:The Cash Budget 228

7 Flexible Budgets, Direct-Cost Variances,

and Management Control 248

SingaDeli Bakery

Static Budgets and Variances 249

The Use of Variances 249

Static Budgets and Static-Budget Variances 250

Concepts in Action: Starbucks Reduces Direct-Cost

Variances to Brew a Turnaround

Summary of Variances 261

Journal Entries Using Standard Costs 262

Implementing Standard Costing 263

Standard Costing and Information Technology 263

Wide Applicability of Standard Costing 264

Management Uses of Variances 264

Multiple Causes of Variances 264

When to Investigate Variances 264

Performance Measurement Using Variances 265

Organization Learning 265

Continuous Improvement 266

Financial and Nonfinancial Performance

Measures 266

Benchmarking and Variance Analysis 266

APPENDIX:Market-Share and Market-Size Variances 270

8 Flexible Budgets, Overhead Cost Variances, and Management Control 284Overhead Cost Variances Force Macy’s to Shop for Changes in Strategy

Planning of Variable and Fixed Overhead Costs 285Planning Variable Overhead Costs 286

Planning Fixed Overhead Costs 286Standard Costing at Webb Company 286Developing Budgeted Variable Overhead Rates 287Developing Budgeted Fixed Overhead Rates 288Variable Overhead Cost Variances 289

Flexible-Budget Analysis 289Variable Overhead Efficiency Variance 289Variable Overhead Spending Variance 291Journal Entries for Variable Overhead Costs andVariances 292

Fixed Overhead Cost Variances 293Production-Volume Variance 294Interpreting the Production-Volume Variance 295Journal Entries for Fixed Overhead Costs andVariances 296

Integrated Analysis of Overhead Cost Variances 2984-Variance Analysis 299

Combined Variance Analysis 300Production-Volume Variance and Sales-VolumeVariance 300

Concepts in Action: Variance Analysis and Standard Costing Help Sandoz Manage Its Overhead Costs

Variance Analysis and Activity-Based Costing 303Flexible Budget and Variance Analysis for DirectLabor Costs 304

Flexible Budget and Variance Analysis for FixedSetup Overhead Costs 306

Overhead Variances in Nonmanufacturing Settings 307Financial and Nonfinancial Performance

9 Inventory Costing and Capacity Analysis 322

Lean Manufacturing Helps Companies Reduce Inventory and Survive the Recession

Variable and Absorption Costing 323Variable Costing 323

Absorption Costing 324Comparing Variable and Absoption Costing 324Variable vs Absorption Costing: Operating Income andIncome Statements 325

Comparing Income Statements for One Year 325Comparing Income Statements for Three Years 327

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CONTENTS 䊉 7

Variable Costing and the Effect of Sales and

Production on Operating Income 330

Absorption Costing and Performance Measurement 331

Undesirable Buildup of Inventories 332

Proposals for Revising Performance Evaluation 333

Comparing Inventory Costing Methods 334

Absorption Costing and Alternative

Denominator-Level Capacity Concepts 336

Effect on Budgeted Fixed Manufacturing Cost

Rate 337

Choosing a Capacity Level 338

Product Costing and Capacity Management 338

Pricing Decisions and the Downward Demand

Spiral 339

Performance Evaluation 340

Concepts in Action: The “Death Spiral” and the End of

Landline Telephone Service

External Reporting 342

Tax Requirements 344

Planning and Control of Capacity Costs 345

Difficulties in Forecasting Chosen Denominator-Level

APPENDIX:Breakeven Points in Variable Costing and

Absorption Costing 349

10 Determining How Costs Behave 362

Management Accountants at Cisco Embrace

Opportunities, Enhance Sustainability

Basic Assumptions and Examples of Cost Functions 363

Basic Assumptions 364

Linear Cost Functions 364

Review of Cost Classification 365

Identifying Cost Drivers 366

The Cause-and-Effect Criterion 367

Cost Drivers and the Decision-Making Process 367

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 QuantitativeAnalysis 370

High-Low Method 372Regression Analysis Method 374Evaluating Cost Drivers of the Estimated CostFunction 375

Choosing Among Cost Drivers 376

Concepts in Action: Activity-Based Costing:

Identifying Cost and Revenue Drivers

Cost Drivers and Activity-Based Costing 378Nonlinear Cost Functions 379

Learning Curves 380Cumulative Average-Time Learning Model 381Incremental Unit-Time Learning Model 382Incorporating Learning-Curve Effects into Prices andStandards 383

Data Collection and Adjustment Issues 384Problem for Self-Study 386 | Decision Points 388

11 Decision Making and Relevant Information 412

Relevant Costs, JetBlue, and Twitter

Information and the Decision Process 413The Concept of Relevance 414

Relevant Costs and Relevant Revenues 415Qualitative and Quantitative Relevant Information 416

An Illustration of Relevance: Choosing Output Levels 416

One-Time-Only Special Orders 416Potential Problems in Relevant-Cost Analysis 419Insourcing-versus-Outsourcing and Make-versus-BuyDecisions 419

Outsourcing and Idle Facilities 419Strategic and Qualitative Factors 421

Concepts in Action: Pringles Prints and the Offshoring

of Innovation

International Outsourcing 422Opportunity Costs and Outsourcing 423The Opportunity-Cost Approach 424Carrying Costs of Inventory 425Product-Mix Decisions with Capacity Constraints 427Customer Profitability, Activity-Based Costing, andRelevant Costs 428

Relevant-Revenue and Relevant-Cost Analysis ofDropping a Customer 430

Relevant-Revenue and Relevant-Cost Analysis ofAdding a Customer 431

Relevant-Revenue and Relevant-Cost Analysis ofClosing or Adding Branch Offices or Segments 431

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Irrelevance of Past Costs and Equipment-Replacement

Decisions 432

Decisions and Performance Evaluation 434

APPENDIX:Linear Programming 438

12 Pricing Decisions and Cost

Management 454

Target Pricing and Tata Motors’ $2,500 Car

Major Influences on Pricing Decisions 455

Customers, Competitors, and Costs 456

Costing and Pricing for the Short Run 456

Relevant Costs for Short-Run Pricing Decisions 457

Strategic and Other Factors in Short-Run Pricing 457

Effect of Time Horizon on Short-Run Pricing

Decisions 457

Costing and Pricing for the Long Run 458

Calculating Product Costs for Long-Run Pricing

Decisions 458

Alternative Long-Run Pricing Approaches 459

Target Costing for Target Pricing 461

Understanding Customers’ Perceived Value 461

Doing Competitor Analysis 461

Implementing Target Pricing and Target Costing 462

Concepts in Action: Extreme Target Pricing and Cost

Cost-Plus Target Rate of Return on Investment 467

Alternative Cost-Plus Methods 468

Cost-Plus Pricing and Target Pricing 469

Life-Cycle Product Budgeting and Costing 469

Life-Cycle Budgeting and Pricing Decisions 470

Customer Life-Cycle Costing 471

Additional Considerations for Pricing Decisions 472

Price Discrimination 472

Peak-Load Pricing 472

International Considerations 473

Antitrust Laws 473

Problem for Self-Study 474 | Decision Points 476 | Terms

to Learn 477 | Assignment Material 477 | Questions 477

| Exercises 478 | Problems 482 | Collaborative Learning

Problem 487

13 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 488Balanced Scorecard Helps Infosys Transform into a Leading Consultancy

What Is Strategy? 489Building Internal Capabilities: Quality Improvementand Reengineering at Chipset 491

Strategy Implementation and the Balanced Scorecard 492

The Balanced Scorecard 492Strategy Maps and the Balanced Scorecard 493Implementing a Balanced Scorecard 496Aligning the Balanced Scorecard to Strategy 497Features of a Good Balanced Scorecard 497Pitfalls in Implementing a Balanced Scorecard 498Evaluating the Success of Strategy and

Implementation 499Strategic Analysis of Operating Income 500Growth Component of Change in OperatingIncome 501

Price-Recovery Component of Change in OperatingIncome 503

Productivity Component of Change in OperatingIncome 504

Further Analysis of Growth, Price-Recovery, andProductivity Components 505

Concepts in Action: The Growth Versus Profitability Choice at Facebook

Applying the Five-Step Decision-Making Framework toStrategy 507

Downsizing and the Management of ProcessingCapacity 508

Engineered and Discretionary Costs 508Identifying Unused Capacity for Engineered andDiscretionary Overhead Costs 509

Managing Unused Capacity 509Problem for Self-Study 510 | Decision Points 514

14 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis 524Globe Express Services ® (Overseas Group): Analyzing Customers at the United Arab Emirates' Branch

Purposes of Cost Allocation 525Criteria to Guide Cost-Allocation Decisions 526Cost Allocation Decisions 528

Allocating Corporate Costs to Divisions andProducts 530

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Presenting Profitability Analysis 537

Using the Five-Step Decision-Making Process to

Manage Customer Profitability 539

Concepts in Action: Measuring Customer Profitability

APPENDIX:Mix and Yield Variances for Substitutable

Inputs 547

15 Allocation of Support-Department Costs,

Common Costs, and Revenues 564

Cost Allocation and the Future of “Smart Grid” Energy

Infrastructure

Allocating Support Department Costs Using the

Single-Rate and Dual-Single-Rate Methods 565

Single-Rate and Dual-Rate Methods 566

Allocation Based on the Demand for (or Usage of)

Computer Services 566

Allocation Based on the Supply of Capacity 567

Single-Rate Versus Dual-Rate Method 568

Budgeted Versus Actual Costs, and the Choice of

Allocaton Base 569

Budgeted Versus Actual Rates 569

Budgeted Versus Actual Usage 570

Allocating Costs of Multiple Support Departments 572

Direct Method 572

Step-Down Method 573

Reciprocal Method 575

Overview of Methods 578

Allocating Common Costs 579

Stand-Alone Cost-Allocation Method 579

Incremental Cost-Allocation Method 579

Cost Allocations and Contract Disputes 580

Contracting with the U.S Government 581

Fairness of Pricing 581

Concepts in Action: Contract Disputes over

Reimbursable Costs for the U.S Department

16 Cost Allocation: Joint Products and Byproducts 598

Joint Cost Allocation and the Production of Ethanol Fuel

Joint-Cost Basics 599Allocating Joint Costs 601Approaches to Allocating Joint Costs 601Sales Value at Splitoff Method 602Physical-Measure Method 604Net Realizable Value Method 605Constant Gross-Margin Percentage NRV Method 606Choosing an Allocation Method 608

Not Allocating Joint Costs 609Irrelevance of Joint Costs for Decision Making 609Sell-or-Process-Further Decisions 609

Joint-Cost Allocation and Performance Evaluation 610

Pricing Decisions 611Accounting for Byproducts 611

Concepts in Action: Byproduct Costing Keeps Wendy’s Chili Profitable and on the Menu

Production Method: Byproducts Recognized at TimeProduction Is Completed 613

Sales Method: Byproducts Recognized at Time ofSale 614

17 Process Costing 628ExxonMobil and Accounting Differences in the Oil Patch

Illustrating Process Costing 629Case 1: Process Costing with No Beginning or EndingWork-in-Process Inventory 630

Case 2: Process Costing with Zero Beginning and SomeEnding Work-in-Process Inventory 631

Physical Units and Equivalent Units (Steps 1 and 2) 632

Calculation of Product Costs (Steps 3, 4, and 5) 633Journal Entries 634

Case 3: Process Costing with Some Beginning and SomeEnding Work-in-Process Inventory 635

Weighted-Average Method 636First-In, First-Out Method 639

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Comparison of Weighted-Average and FIFO

Methods 642

Transferred-In Costs in Process Costing 643

Transferred-In Costs and the Weighted-Average

Method 644

Transferred-In Costs and the FIFO Method 646

Points to Remember About Transferred-In Costs 647

Hybrid Costing Systems 648

Overview of Operation-Costing Systems 648

Concepts in Action: Hybrid Costing for Customized

Shoes at Adidas

Illustration of an Operation-Costing System 649

Journal Entries 651

APPENDIX:Standard-Costing Method of Process

18 Spoilage, Rework, and Scrap 666

Rework Delays the Boeing Dreamliner by Three Years

Defining Spoilage, Rework and Scrap 667

Two Types of Spoilage 668

Normal Spoilage 668

Abnormal Spoilage 668

Spoilage in Process Costing Using Weighted-Average

and FIFO 669

Count All Spoilage 669

Five-Step Procedure for Process Costing with

Spoilage 670

Weighted-Average Method and Spoilage 671

FIFO Method and Spoilage 671

Journal Entries 674

Inspection Points and Allocating Costs of Normal

Spoilage 674

Job Costing and Spoilage 677

Job Costing and Rework 678

Accounting for Scrap 679

Recognizing Scrap at the Time of Its Sale 679

Recognizing Scrap at the Time of Its Production 680

Concepts in Action: Managing Waste and

Environmental Costs at KB Home

APPENDIX:Standard-Costing Method and Spoilage 683

19 Balanced Scorecard: Quality, Time, and the Theory of Constraints 692

Toyota Plans Changes After Millions of Defective Cars Are Recalled

Quality as a Competitive Tool 693The Financial Perspective: Costs of Quality 694The Customer Perspective: Nonfinancial Measures ofCustomer Satisfaction 697

The Internal-Business-Process Perspective: AnalyzingQuality Problems and Improving Quality 697Nonfinancial Measures of Internal-Business-ProcessQuality 700

The Learning-and-Growth Perspective: QualityImprovements 700

Making Decisions and Evaluating QualityPerformance 700

Time as a Competitive Tool 702Customer-Response Time and On-TimePerformance 703

Bottlenecks and Time Drivers 704

Concepts in Action: Overcoming Wireless Data Bottlenecks

Relevant Revenues and Relevant Costs of Time 706Theory of Constraints and Throughput-MarginAnalysis 708

20 Inventory Management, Just-in-Time, and Simplified Costing Methods 724Costco Aggressively Manages Inventory to Thrive in Tough Times

Inventory Management in Retail Organizations 725Costs Associated with Goods for Sale 725Economic-Order-Quantity Decision Model 726When to Order, Assuming Certainty 729Safety Stock 729

Estimating Inventory-Related Relevant Costs and TheirEffects 731

Considerations in Obtaining Estimates of RelevantCosts 731

Cost of a Prediction Error 731Conflict Between the EOQ Decision Model andManagers’ Performance Evaluation 732Just-in-Time Purchasing 733

JIT Purchasing and EOQ Model Parameters 733Relevant Costs of JIT Purchasing 733

Supplier Evaluation and Relevant Costs of Qualityand Timely Deliveries 734

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CONTENTS 䊉 11

JIT Purchasing, Planning and Control, and

Supply-Chain Analysis 735

Inventory Management, MRP and JIT Production 736

Materials Requirements Planning 736

JIT Production 737

Features of JIT Production Systems 737

Financial Benefits of JIT and Relevant Costs 737

JIT in Service Industries 738

Enterprise Resource Planning (ERP) Systems 738

Concepts in Action: After the Encore: Just-in-Time

Live Concert Recordings

Performance Measures and Control in JIT

Production 740

Effect of JIT Systems on Product Costing 740

Backflush Costing 740

Simplified Normal or Standard Costing Systems 740

Accounting for Variances 744

Special Considerations in Backflush Costing 748

Lean Accounting 748

Problem 759

21 Capital Budgeting and Cost Analysis 760

Target’s Capital Budgeting Hits the Bull’s-Eye

Stages of Capital Budgeting 761

Discounted Cash Flow 763

Net Present Value Method 764

Internal Rate-of-Return Method 765

Comparison of Net Present Value and Internal

Rate-of-Return Methods 767

Sensitivity Analysis 767

Payback Method 768

Uniform Cash Flows 768

Nonuniform Cash Flows 769

Accrual Accounting Rate-of-Return Method 771

Relevant Cash Flows in Discounted Cash Flow

Analysis 772

Relevant After-Tax Flows 772

Categories of Cash Flows 774

Project Management and Performance Evaluation 777

Post-Investment Audits 778

Performance Evaluation 778

Strategic Considerations in Capital Budgeting 779

Investment in Research and Development 779

Customer Value and Capital Budgeting 779

Concepts in Action: International Capital Budgeting

at Disney

APPENDIX:Capital Budgeting and Inflation 784

Collaborative Learning Problem 794 | Answers to Exercises

in Compound Interest (Exercise 21-16) 794

22 Management Control Systems, Transfer Pricing, and Multinational

Considerations 796Transfer Pricing Disputes and Tax Issues Stop Collaborations Between Subunits of Mehr Co.

Management Control Systems 797Formal and Informal Systems 797Effective Management Control 798Decentralization 798

Benefits of Decentralization 799Costs of Decentralization 800Comparison of Benefits and Costs 801Decentralization in Multinational Companies 801Choices About Responsibility Centers 801Transfer Pricing 802

Criteria for Evaluating Transfer Prices 802Calculating Transfer Prices 803

An Illustration of Transfer Pricing 803Market-Based Transfer Prices 806Perfectly-Competitive-Market Case 806Distress Prices 806

Imperfect Competition 807Cost-Based Transfer Prices 807Full-Cost Bases 807

Variable-Cost Bases 809Hybrid Transfer Prices 809Prorating the Difference Between Maximum andMinimum Transfer Prices 810

Negotiated Pricing 810Dual Pricing 811

A General Guideline for Transfer-Pricing Situations 812Multinational Transfer Pricing and Tax

Considerations 813Transfer Pricing for Tax Minimization 814

Concepts in Action: Transfer Pricing Dispute Temporarily Stops the Flow of Fiji Water

Transfer Prices Designed for Multiple Objectives 815Additional Issues in Transfer Pricing 816

23 Performance Measurement, Compensation, and Multinational Considerations 828

Misalignment Between CEO Compensation and Performance at AIG

Financial and Nonfinancial Performance Measures 829Accounting-Based Measures for Business Units 830Return on Investment 831

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Residual Income 832

Economic Value Added 834

Return on Sales 835

Comparing Performance Measures 835

Choosing the Details of the Performance Measures 836

Alternative Time Horizons 836

Alternative Definitions of Investment 837

Alternative Asset Measurements 837

Target Levels of Performance and Feedback 840

Choosing Target Levels of Performance 840

Choosing the Timing of Feedback 840

Performance Measurement in Multinational

Benchmarks and Relative Performance Evaluation 845

Performance Measures at the Individual Activity

Strategy and Levers of Control 848Boundary Systems 848

Appendix A 861 Appendix B: Recommended Readings—available online www.pearsonglobaleditions.com/horngren Appendix C: Cost Accounting in Professional Examination—available online

www.pearsonglobaleditions.com/horngren Glossary 868

Author Index 879 Company Index 880 Subject Index 882

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About the Authors

Charles T Horngren is the Edmund W Littlefield Professor of Accounting, Emeritus, at

Stanford University A Graduate of Marquette University, he received his MBA from

Harvard University and his PhD from the University of Chicago He is also the recipient

of honorary doctorates from Marquette University and DePaul University

A certified public accountant, Horngren served on the Accounting Principles Board

for six years, the Financial Accounting Standards Board Advisory Council for five years,

and the Council of the American Institute of Certified Public Accountants for three years

For six years, he served as a trustee of the Financial Accounting Foundation, which

over-sees the Financial Accounting Standards Board and the Government Accounting

Standards Board Horngren is a member of the Accounting Hall of Fame

A member of the American Accounting Association, Horngren has been its president

and its director of research He received its first Outstanding Accounting Educator

Award The California Certified Public Accountants Foundation gave Horngren its

Faculty Excellence Award and its Distinguished Professor Award He is the first person to

have received both awards

The American Institute of Certified Public Accountants presented its first

Outstanding Educator Award to Horngren

Horngren was named Accountant of the Year, Education, by the national professional

accounting fraternity, Beta Alpha Psi

Professor Horngren is also a member of the Institute of Management Accountants,

from whom he received its Distinguished Service Award He was also a member of the

Institutes’ Board of Regents, which administers the Certified Management Accountant

examinations

Horngren is the author of other accounting books published by Pearson Education:

Introduction to Management Accounting, 15th ed (2011, with Sundem and Stratton);

Introduction to Financial Accounting, 10th ed (2011, with Sundem and Elliott);

Accounting, 8th ed (2010, with Harrison and Bamber); and Financial Accounting, 8th ed.

(2010, with Harrison)

Horngren is the Consulting Editor for the Charles T Horngren Series in Accounting

Srikant M Datar is the Arthur Lowes Dickinson Professor of Business Administration and

Senior Associate Dean at Harvard University A graduate with distinction from the

University of Bombay, he received gold medals upon graduation from the Indian Institute

of Management, Ahmedabad, and the Institute of Cost and Works Accountants of India

A chartered accountant, he holds two master’s degrees and a PhD from Stanford

University

Cited by his students as a dedicated and innovative teacher, Datar received the George

Leland Bach Award for Excellence in the Classroom at Carnegie Mellon University and

the Distinguished Teaching Award at Stanford University

Datar has published his research in leading accounting, marketing, and operations

management journals, including The Accounting Review, Contemporary Accounting

Research, Journal of Accounting, Auditing and Finance, Journal of Accounting and

Economics, Journal of Accounting Research, and Management Science He has also

served on the editorial board of several journals and presented his research to corporate

executives and academic audiences in North America, South America, Asia, Africa,

Australia, and Europe

Datar is a member of the board of directors of Novartis A.G., ICF International,

KPIT Cummins Infosystems Ltd., Stryker Corporation, and Harvard Business Publishing,

and has worked with many organizations, including Apple Computer, AT&T, Boeing, Du

Pont, Ford, General Motors, HSBC, Hewlett-Packard, Morgan Stanley, PepsiCo, TRW,

Trang 15

Visa, and the World Bank He is a member of the American Accounting Association andthe Institute of Management Accountants.

Madhav V Rajanis the Gregor G Peterson Professor of Accounting and Senior AssociateDean at Stanford University From 2002 to 2010, he was the area coordinator foraccounting at Stanford’s Graduate School of Business

Rajan received his undergraduate degree in commerce from the University of Madras,India, and his MS in accounting, MBA, and PhD degrees from the Graduate School ofIndustrial Administration at Carnegie Mellon University In 1990, his dissertation wonthe Alexander Henderson Award for Excellence in Economic Theory

Rajan’s primary area of research interest is the economics-based analysis of ment accounting issues, especially as they relate to internal control cost allocation, capitalbudgeting, quality management, supply chain, and performance systems in firms He haspublished his research in leading accounting and operations management journals includ-

manage-ing The Accountmanage-ing Review, Review of Financial Studies, Journal of Accountmanage-ing

Research, and Management Science In 2004, he received the Notable Contribution to

Management Accounting Literature Award

Rajan has served as the Departmental Editor for Accounting at Management Science,

as well as associate editor for both the accounting and operations areas From 2002 to

2008, Rajan served as an editor of The Accounting Review He is also currently an ciate editor for the Journal of Accounting, Auditing and Finance Rajan is a member of

asso-the management accounting section of asso-the American Accounting Association and hastwice been a plenary speaker at the AAA Management Accounting Conference

Rajan has won several teaching awards at Wharton and Stanford, including theDavid W Hauck Award, the highest undergraduate teaching honor at Wharton Rajanhas taught in a variety of executive education programs including the Stanford ExecutiveProgram, the National Football League Program for Managers, and the NationalBasketball Players Association Program, as well as custom programs for firms includingnVidia, Genentech, and Google

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Studying Cost Accountingis one of the best business investments a student can

make Why? Because success in any organization—from the smallest corner store to the

largest multinational corporation—requires the use of cost accounting concepts and

prac-tices Cost accounting provides key data to managers for planning and controlling, as well

as costing products, services, even customers This book focuses on how cost accounting

helps managers make better decisions, as cost accountants are increasingly becoming

inte-gral members of their company’s decision-making teams In order to emphasize this

promi-nence in decision-making, we use the “different costs for different purposes” theme

throughout this book By focusing on basic concepts, analyses, uses, and procedures

instead of procedures alone, we recognize cost accounting as a managerial tool for business

strategy and implementation

We also prepare students for the rewards and challenges they face in the professional

cost accounting world of today and tomorrow For example, we emphasize both the

development of analytical skills such as Excel to leverage available information

technol-ogy and the values and behaviors that make cost accountants effective in the workplace

䊉 Exceptionally strong emphasis on managerial uses of cost information

䊉 Clarity and understandability of the text

䊉 Excellent balance in integrating modern topics with traditional coverage

䊉 Extensive use of real-world examples

䊉 Ability to teach chapters in different sequences

䊉 Excellent quantity, quality, and range of assignment material

The first thirteen chapters provide the essence of a one-term (quarter or semester) course

There is ample text and assignment material in the book’s twenty-three chapters for a

two-term course This book can be used immediately after the student has had an

intro-ductory course in financial accounting Alternatively, this book can build on an

introduc-tory course in managerial accounting

Deciding on the sequence of chapters in a textbook is a challenge Since every

instruc-tor has a unique way of organizing his or her course, we utilize a modular, flexible

organ-ization that permits a course to be custom tailored This organorgan-ization facilitates diverse

approaches to teaching and learning.

As an example of the book’s flexibility, consider our treatment of process costing Process

costing is described in Chapters 17 and 18 Instructors interested in filling out a student’s

per-spective of costing systems can move directly from job-order costing described in Chapter 4 to

Chapter 17 without interruption in the flow of material Other instructors may want their

stu-dents to delve into activity-based costing and budgeting and more decision-oriented topics

early in the course These instructors may prefer to postpone discussion of process costing

New to This Edition

Greater Emphasis on Strategy

This edition deepens the book’s emphasis on strategy development and execution Several

chapters build on the strategy theme introduced in Chapter 1 Chapter 13 has a greater

discussion of strategy maps as a useful tool to implement the balanced scorecard and a

Preface

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simplified presentation of how income statements of companies can be analyzed from thestrategic perspective of product differentiation or cost leadership We also discuss strategyconsiderations in the design of activity-based costing systems in Chapter 5, the prepara-tion of budgets in Chapter 6, and decision making in Chapters 11 and 12.

Deeper Consideration of Global Issues

Business is increasingly becoming more global Even small and medium-sized companiesacross the manufacturing, merchandising, and service sectors are being forced to dealwith the effects of globalization Global considerations permeate many chapters Forexample, Chapter 11 discusses the benefits and the challenges that arise when outsourcingproducts or services outside the United States Chapter 22 examines the importance oftransfer pricing in minimizing the tax burden faced by multinational companies Severalnew examples of management accounting applications in companies are drawn frominternational settings

Increased Focus on the Service Sector

In keeping with the shifts in the U.S and world economy this edition makes greater use

of service sector examples For example, Chapter 2 discusses the concepts around themeasurement of costs in a software development rather than a manufacturing setting.Chapter 6 provides several examples of the use of budgets and targets in service compa-nies Several concepts in action boxes focus on the service sector such as managing wire-less data bottlenecks (Chapter 19)

New Cutting Edge Topics

The pace of change in organizations continues to be rapid The fourteenth edition of Cost

Accounting reflects changes occurring in the role of cost accounting in organizations.

䊉 We have introduced foreign currency and forward contract issues in the context ofoutsourcing decisions

䊉 We have added ideas based on Six Sigma to the discussion of quality

䊉 We have rewritten the chapter on strategy and the balanced scorecard and simplifiedthe presentation to connect strategy development, strategy maps, balanced scorecard,and analysis of operating income

䊉 We discuss current trends towards Beyond Budgeting and the use of rolling forecasts

䊉 We develop the link between traditional forms of cost allocation and the nascentmovement in Europe towards Resource Consumption Accounting

䊉 We focus more sharply on how companies are simplifying their costing systems withthe presentation of value streams and lean accounting

Opening Vignettes

Each chapter opens with a vignette which engages the reader in a business situation, ordilemma, illustrating why and how the concepts in the chapter are relevant in business Forexample, Chapter 1 describes how Apple uses cost accounting information to make deci-sions relating to how they price the most popular songs on iTunes Chapter 3 explains howthe band U2 paid for their extensive new stage by lowering ticket prices Chapter 11 showshow JetBlue uses Twitter and e-mail to help their customers make better pricing decisions.Chapter 12 discusses how Tata Motors designed a car for the Indian masses, priced at only

$2,500 Chapter 18 describes how Boeing incurred great losses as it reworked its anticipated Dreamliner airplane

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much-PREFACE 䊉 17

Concepts in Action Boxes

Found in every chapter, these boxes cover real-world cost accounting issues across a

vari-ety of industries including automobile racing, defense contracting, entertainment,

manu-facturing, and retailing New examples include

䊉 How Zipcar Helps Reduce Business Transportation Costs p 55

䊉 Job Costing at Cowboys Stadium p 130

䊉 The “Death Spiral” and the End of Landline Telephone Service p 341

䊉 Transfer Pricing Dispute Temporarily Stops the Flow of Fiji Water p 815

Streamlined Presentation

We continue to try to simplify and streamline our presentation of various topics to make

it as easy as possible for a student to learn the concepts, tools, and frameworks introduced

in different chapters Examples of more streamlined presentations can be found in

䊉 Chapter 3 on the discussion of target net income

䊉 Chapter 5 on the core issues in activity-based costing (ABC)

䊉 Chapter 8, which uses a single comprehensive example to illustrate the use of variance

analysis in ABC systems

䊉 Chapter 13, which has a much simpler presentation of the strategic analysis of

operat-ing income

䊉 Chapter 15, which uses a simpler, unified framework to discuss various cost-allocation

methods

䊉 Chapters 17 and 18, where the material on standard costing has been moved to the

appendix, allowing for smoother transitions through the sections in the body of

the chapter

Selected Chapter-by-Chapter Content Changes

Thank you for your continued support of Cost Accounting In every new edition, we

strive to update this text thoroughly To ease your transition from the thirteenth edition,

here are selected highlights of chapter changes for the fourteenth edition.

Chapter 1 has been rewritten to focus on strategy, decision-making, and learning

emphasizing the managerial issues that animate modern management accounting It now

emphasizes decision making instead of problem solving, performance evaluation instead

of scorekeeping and learning instead of attention directing

Chapter 2 has been rewritten to emphasize the service sector For example, instead of

a manufacturing company context, the chapter uses the software development setting at a

company like Apple Inc to discuss cost measurement It also develops ideas related to risk

when discussing fixed versus variable costs

Chapter 3 has been rewritten to simplify the presentation of target net income by

describing how target net income can be converted to target operating income This

allows students to use the equations already developed for target operating income when

discussing target net income We deleted the section on multiple cost drivers, because it is

closely related to the multi-product example discussed in the chapter The managerial and

decision-making aspects of the chapter have also been strengthened

Chapter 4 has been reorganized to first discuss normal costing and then actual

cost-ing because normal costcost-ing is much more prevalent in practice As a result of this change

the exhibits in the early part of the chapter tie in more closely to the detailed exhibits of

normal job-costing systems in manufacturing later in the chapter The presentation

of actual costing has been retained to help students understand the benefits and challenges

of actual costing systems To focus on job costing, we moved the discussion of

responsibil-ity centers and departments to Chapter 6

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Chapter 5 has been reorganized to clearly distinguish design choices, implementationchallenges, and managerial applications of ABC systems The presentation of the ideashas been simplified and streamlined to focus on the core issues

Chapter 6 now includes ideas from relevant applied research on the usefulness ofbudgets and the circumstances in which they add the greatest value, as well as the chal-lenges in administering them It incorporates new material on the Beyond Budgetingmovement, and in particular the trend towards the use of rolling forecasts

Chapters 7 and 8 present a streamlined discussion of direct-cost and overhead ances, respectively The separate sections on ABC and variance analysis in Chapters 7 and 8 have now been combined into a single integrated example at the end of Chapter 8 Anew appendix to Chapter 7 now addresses more detailed revenue variances using the exist-ing Webb Company example The use of potentially confusing terms such as 2-varianceanalysis and 1-variance analysis has been eliminated

vari-We have rewritten Chapter 9 as a single integrated chapter with the same runningexample rather than as two distinct sub-parts on inventory costing and capacity analysis.The material on the tax and financial reporting implications of various capacity conceptshas also been fully revised

Chapter 10 has been revised to provide a more linear progression through the ideas ofcost estimation and the choice of cost drivers, culminating in the use of quantitativeanalysis (regression analysis, in particular) for managerial decision-making

Chapter 11 now includes more discussion of global issues such as foreign currencyconsiderations in international outsourcing decisions There is also greater emphasis onstrategy and decision-making

Chapter 12 has been reorganized to more sharply delineate short-run from long-run ing and pricing and to bring together the various considerations other than costs that affectpricing decisions This reorganization has helped streamline several sections in the chapter Chapter 13 has been substantially rewritten Strategy maps are presented as a way tolink strategic objectives and as a useful first step in developing balanced scorecard meas-ures The section on strategic analysis of operating income has been significantly simpli-fied by focusing on only one indirect cost and eliminating most of the technical details.Finally, the section on engineered and discretionary costs has been considerably shortened

cost-to focus on only the key ideas

Chapter 14 now discusses the use of “whale curves” to depict the outcome of tomer profitability analysis The last part of the chapter has been rationalized to focus onthe decomposition of sales volume variances into quantity and mix variances; and the cal-culation of sales mix variances has also been simplified

cus-Chapter 15 has been completely revised and uses a simple, unified conceptual work to discuss various cost allocation methods (single-rate versus dual-rate, actual costsversus budgeted costs, etc.)

frame-Chapter 16 now provides a more in-depth discussion of the rationale underlying joint

cost allocation as well as the reasons why some firms do not allocate costs (along with

real-world examples)

Chapters 17 and 18 have been reorganized, with the material on standard costing moved

to the appendix in both chapters This reorganization has made the chapters easier to navigateand fully consistent (since all sections in the body of the chapter now use actual costing) Thematerial on multiple inspection points from the appendix to Chapter 18 has been moved intothe body of the chapter, but using a variant of the existing example involving Anzio Corp.Chapter 19 introduces the idea of Six Sigma quality It also integrates design quality,conformance quality, and financial and nonfinancial measures of quality The discussion

of queues, delays, and costs of time has been significantly streamlined

Chapter 20’s discussion of EOQ has been substantially revised and the ideas oflean accounting further developed The section on backflush costing has been com-pletely rewritten

Chapter 21 has been revised to incorporate the payback period method with counting, and also now includes survey evidence on the use of various capital budgetingmethods The discussion of goal congruence and performance measurement has been sim-plified and combined, making the latter half of the chapter easier to follow

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dis-PREFACE 䊉 19

Chapter 22 has been fully rewritten with a new section on the use of hybrid pricing

methods The chapter also now includes a fuller description (and a variety of examples) of

the use of transfer pricing for tax minimization, and incorporates such developments as

the recent tax changes proposed by the Obama administration

Chapter 23 includes a more thorough description of Residual Income and EVA, as

well as a more streamlined discussion of the various choices of accounting-based

perform-ance measures

Resources

In addition to this textbook and MyAccountingLab, the following resources are available

for students:

䊉 Student Study Guide—self study aid full of review features

䊉 Student Solutions Manual—solutions and assistance for even numbered problems

䊉 Excel Manual—workbook designed for Excel practice

The following resources are available for Instructors at www.pearsonglobaleditions.com/

We are indebted to many people for their ideas and assistance Our primary thanks go to

the many academics and practitioners who have advanced our knowledge of cost

accounting The package of teaching materials we present is the work of skillful and

val-ued team members developing some excellent end-of-chapter assignment material

Tommy Goodwin, Ian Gow (Northwestern), Richard Saouma (UCLA) and Shalin Shah

(Berkeley) provided outstanding research assistance on technical issues and current

developments We would also like to thank the dedicated and hard working supplement

author team and GEX Publishing Services The book is much better because of the

efforts of these colleagues

In shaping this edition, we would like to thank a group of colleagues who worked

closely with us and the editorial team This group provided detailed feedback and

partic-ipated in focus groups that guided the direction of this edition:

Trang 21

We would also like to extend our thanks to those professors who provided detailedwritten reviews or comments on drafts These professors include the following:

Robyn Alcock

Central Queensland University

David S Baglia

Grove City College

Charles Bailey

University of Central Florida

Larry N Killough

Virginia Polytechnic Institute & State University

Keith Kramer

Southern Oregon University

Jay Law

Central Washington University

Leslie Kren

University of Wisconsin-Madison

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PREFACE 䊉 21

International Contributors:

Dr Ahmed Abdel-Maksoud

United Arab Emirates

University, United Arab

Emirates and Mustapha

Kawam, Gulf Area

Manager, Globe Express

Services (Overseas Group)

Dr Davood Askarany

The University of Auckland

Business School, The

University of Auckland,

New Zealand

Chye Tee Goh

Associate Professor, Nanyang Business School, Nanyang Technological University, Singapore

Dr Robert W McGee

Florida International University, Miami, USA visiting Professor at Thammasat University, Thailand

Dr Paolo Perego

Rotterdam School of Management, Erasmus University, The Netherlands and

College of Business &

Finance, Ahlia University,

Bahrain

Mabel Lam

Assistant Professor, Lee Shau Kee School of Business & Administration, The Open University of Hong Kong

Dr John Mwita

Senior Lecturer, Accounting

& Finance, University of East London, UK

Dr Kousay Said

Assistant Professor, University Of Bahrain, Kingdom of Bahrain

Dr ShenbaKanagasabapathy

Senior Lecturer, Department of Business Studies, HELP University College, Malaysia

Dr Joyce Linghua Wang

School of Accountancy, The Chinese University of Hong Kong, Hong Kong

We also would like to thank our colleagues who helped us greatly by accuracy checking

the text and supplements including Molly Brown, Barbara Durham, and Anna Jensen

We thank the people at Pearson Education for their hard work and dedication,

including Donna Battista, Stephanie Wall, Christina Rumbaugh, Brian Reilly, Cindy

Zonneveld, Lynne Breitfeller, Natacha Moore, and Kate Thomas and Kelly Morrison at

GEX Publishing Services We must extend special thanks to Deepa Chungi, the

develop-ment editor on this edition, who took charge of this project and directed it across the

fin-ish line This book would not have been possible without her dedication and skill

Alexandra Gural, Jacqueline Archer, and others expertly managed the production aspects

of all the manuscript preparation with superb skill and tremendous dedication We are deeply

appreciative of their good spirits, loyalty, and ability to stay calm in the most hectic of times

The constant support of Bianca Baggio and Caroline Roop is greatly appreciated

Appreciation also goes to the American Institute of Certified Public Accountants, the

Institute of Management Accountants, the Society of Management Accountants of

Canada, the Certified General Accountants Association of Canada, the Financial

Executive Institute of America, and many other publishers and companies for their

gener-ous permission to quote from their publications Problems from the Uniform CPA

exami-nations are designated (CPA); problems from the Certified Management Accountant

examination are designated (CMA); problems from the Canadian examinations

adminis-tered by the Society of Management Accountants are designated (SMA); and problems

from the Certified General Accountants Association are designated (CGA) Many of these

problems are adapted to highlight particular points

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tion Their names are indicated in parentheses at the start of their specific problems.Comments from users are welcome.

CHARLEST HORNGREN

SRIKANTM DATAR

MADHAVV RAJAN

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To Our Families

The Horngren Family (CH) Swati, Radhika, Gayatri, Sidharth (SD) Gayathri, Sanjana, Anupama (MVR)

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All businesses are concerned about revenues and costs

Whether their products are automobiles, fast food, or the latest designer fashions, managers must understand how revenues and costs behave or risk losing control Managers use cost accounting information to make decisions related to strategy formulation, research and development, budgeting, production planning, and pricing, among others Sometimes these decisions involve tradeoffs The following article shows how companies like Apple make those tradeoffs to increase their profits.

iTunes Variable Pricing: Downloads Are Down,

Can selling less of something be more profitable than selling more of it? In 2009, Apple changed the pricing structure for songs sold through iTunes from a flat fee of $0.99 to a three-tier price point system of

$0.69, $0.99, and $1.29 The top 200 songs in any given week make

up more than one-sixth of digital music sales Apple now charges the higher price of $1.29 for these hit songs by artists like Taylor Swift and the Black Eyed Peas.

After the first six months of the new pricing model in the iTunes store, downloads of the top 200 tracks were down by about 6%.While the number of downloads dropped, the higher prices generated more revenue than before the new pricing structure was in place Since Apple’s iTunes costs—wholesale song costs, network and transaction fees, and other operating costs—do not vary based on the price of each download, the profits from the 30% increase in price more than made up for the losses from the 6% decrease in volume.

To increase profits beyond those created by higher prices, Apple also began to manage iTunes’ costs Transaction costs (what Apple pays credit-card processors like Visa and MasterCard) have

decreased, and Apple has also reduced the number of people working

in the iTunes store.

1

Learning Objectives

1. Distinguish financial accounting

from management accounting

2. Understand how management

accountants affect strategic

decisions

3. Describe the set of business

functions in the value chain and

identify the dimensions of

per-formance that customers are

expecting of companies

4. Explain the five-step

decision-making process and its role in

management accounting

5. Describe three guidelines

manage-ment accountants follow in

sup-porting managers

6. Understand how management

accounting fits into an

organiza-tion’s structure

7. Understand what professional

ethics mean to management

Pacific Crest says; subscription services seems inevitable Barron’s “Tech Trader Daily” blog, April 23.

subscription-service-seems-inevitable/

http://blogs.barrons.com/techtraderdaily/2007/04/23/apple-turns-out-itunes-makes-money-pacific-crest-says-24

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The study of modern cost accounting yields insights into how

managers and accountants can contribute to successfully running

their businesses It also prepares them for leadership roles Many

large companies, such as Constellation Energy, Jones Soda, Nike,

and the Pittsburgh Steelers, have senior executives with

accounting backgrounds.

Financial Accounting, Management

Accounting, and Cost Accounting

As many of you have already seen in your financial accounting class,

accounting systems take economic events and transactions, such as sales and

materials purchases, and process the data into information helpful to

man-agers, sales representatives, production supervisors, and others Processing

any economic transaction means collecting, categorizing, summarizing, and

analyzing For example, costs are collected by category, such as materials,

labor, and shipping These costs are then summarized to determine total

costs by month, quarter, or year The results are analyzed to evaluate, say,

how costs have changed relative to revenues from one period to the next

Accounting systems provide the information found in the income statement,

the balance sheet, the statement of cash flow, and in performance reports, such as the

cost of serving customers or running an advertising campaign Managers use accounting

information to administer the activities, businesses, or functional areas they oversee and

to coordinate those activities, businesses, or functions within the framework of the

organization Understanding this information is essential for managers to do their jobs

Individual managers often require the information in an accounting system to be

presented or reported differently Consider, for example, sales order information A sales

manager may be interested in the total dollar amount of sales to determine the

commis-sions to be paid A distribution manager may be interested in the sales order quantities

by geographic region and by customer-requested delivery dates to ensure timely

deliver-ies A manufacturing manager may be interested in the quantities of various products

and their desired delivery dates, so that he or she can develop an effective production

schedule To simultaneously serve the needs of all three managers, companies create a

database—sometimes called a data warehouse or infobarn—consisting of small, detailed

bits of information that can be used for multiple purposes For instance, the sales order

database will contain detailed information about product, quantity ordered, selling

price, and delivery details (place and date) for each sales order The database stores

infor-mation in a way that allows different managers to access the inforinfor-mation they need

Many companies are building their own Enterprise Resource Planning (ERP) systems,

single databases that collect data and feed it into applications that support the company’s

business activities, such as purchasing, production, distribution, and sales

Financial accounting and management accounting have different goals As many of

you know, financial accounting focuses on reporting to external parties such as

investors, government agencies, banks, and suppliers It measures and records business

transactions and provides financial statements that are based on generally accepted

accounting principles (GAAP) The most important way that financial accounting

information affects managers’ decisions and actions is through compensation, which is

often, in part, based on numbers in financial statements

Learning Objective 1

Distinguish financial accounting reporting on past performance to external users

from management accounting helping managers make decisions

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Management accounting measures, analyzes, and reports financial and nonfinancial

information that helps managers make decisions to fulfill the goals of an organization.Managers use management accounting information to develop, communicate, and imple-ment strategy They also use management accounting information to coordinate productdesign, production, and marketing decisions and to evaluate performance Managementaccounting information and reports do not have to follow set principles or rules The keyquestions are always (1) how will this information help managers do their jobs better, and(2) do the benefits of producing this information exceed the costs?

Exhibit 1-1 summarizes the major differences between management accounting andfinancial accounting Note, however, that reports such as balance sheets, income state-ments, and statements of cash flows are common to both management accounting andfinancial accounting

Cost accounting provides information for management accounting and financial

account-ing Cost accounting measures, analyzes, and reports financial and nonfinancial information

relating to the costs of acquiring or using resources in an organization For example, ing the cost of a product is a cost accounting function that answers financial accounting’sinventory-valuation needs and management accounting’s decision-making needs (such asdeciding how to price products and choosing which products to promote) Modern costaccounting takes the perspective that collecting cost information is a function of the manage-ment decisions being made Thus, the distinction between management accounting and costaccounting is not so clear-cut, and we often use these terms interchangeably in the book

calculat-We frequently hear business people use the term cost management Unfortunately,

that term has no uniform definition We use cost management to describe the approaches

and activities of managers to use resources to increase value to customers and to achieveorganizational goals Cost management decisions include decisions such as whether toenter new markets, implement new organizational processes, and change product designs.Information from accounting systems helps managers to manage costs, but the informa-tion and the accounting systems themselves are not cost management

Cost management has a broad focus and is not only about reduction in costs Costmanagement includes decisions to incur additional costs, for example to improve

Management Accounting Financial Accounting

Purpose of information Help managers make decisions Communicate organization’s financial

to fulfill an organization’s goals position to investors, banks, regulators,

and other outside parties

Primary users Managers of the organization External users such as investors, banks,

regulators, and suppliers

Focus and emphasis Future-oriented (budget for Past-oriented (reports on 2010

2011 prepared in 2010) performance prepared in 2011)

Rules of measurement Internal measures and reports Financial statements must be prepared and reporting do not have to follow GAAP but in accordance with GAAP and be

are based on cost-benefit analysis certified by external, independent auditors

Time span and type of Varies from hourly information Annual and quarterly financial reports, reports to 15 to 20 years, with financial primarily on the company as a whole

and nonfinancial reports on products, departments, territories, and strategies

Behavioral implications Designed to influence the behavior Primarily reports economic events

of managers and other employees but also influences behavior because

manager’s compensation is often based

on reported financial results

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VALUE CHAIN AND SUPPLY CHAIN ANALYSIS AND KEY SUCCESS FACTORS 䊉 27

customer satisfaction and quality and to develop new products, with the goal of

enhanc-ing revenues and profits

Strategic Decisions and the Management

Accountant

Strategy specifies how an organization matches its own capabilities with the opportunities in

the marketplace to accomplish its objectives In other words, strategy describes how an

organization will compete and the opportunities its managers should seek and pursue

Businesses follow one of two broad strategies Some companies, such as Southwest Airlines

and Vanguard (the mutual fund company) follow a cost leadership strategy They have been

profitable and have grown over the years on the basis of providing quality products or

serv-ices at low prserv-ices by judiciously managing their costs Other companies such as Apple Inc.,

the maker of iPods and iPhones, and Johnson & Johnson, the pharmaceutical giant, follow a

product differentiation strategy They generate their profits and growth on the basis of their

ability to offer differentiated or unique products or services that appeal to their customers

and are often priced higher than the less-popular products or services of their competitors

Deciding between these strategies is a critical part of what managers do Management

accountants work closely with managers in formulating strategy by providing

informa-tion about the sources of competitive advantage—for example, the cost, productivity, or

efficiency advantage of their company relative to competitors or the premium prices a

company can charge relative to the costs of adding features that make its products or

serv-ices distinctive Strategic cost management describes cost management that specifically

focuses on strategic issues

Management accounting information helps managers formulate strategy by

answer-ing questions such as the followanswer-ing:

䊏 Who are our most important customers, and how can we be competitive and deliver

value to them? After Amazon.com’s success in selling books online, management

accountants at Barnes and Noble presented senior executives with the costs and

ben-efits of several alternative approaches for building its information technology

infra-structure and developing the capabilities to also sell books online A similar

cost-benefit analysis led Toyota to build flexible computer-integrated manufacturing

(CIM) plants that enable it to use the same equipment efficiently to produce a variety

of cars in response to changing customer tastes

䊏 What substitute products exist in the marketplace, and how do they differ from our

product in terms of price and quality? Hewlett-Packard, for example, designs and

prices new printers after comparing the functionality and quality of its printers to

other printers available in the marketplace

䊏 What is our most critical capability? Is it technology, production, or marketing? How

can we leverage it for new strategic initiatives? Kellogg Company, for example, uses

the reputation of its brand to introduce new types of cereal

䊏 Will adequate cash be available to fund the strategy, or will additional funds need to

be raised? Proctor & Gamble, for example, issued new debt and equity to fund its

strategic acquisition of Gillette, a maker of shaving products

The best-designed strategies and the best-developed capabilities are useless unless they are

effectively executed In the next section, we describe how management accountants help

managers take actions that create value for their customers

Value Chain and Supply Chain Analysis and Key

Success Factors

Customers demand much more than just a fair price; they expect quality products (goods

or services) delivered in a timely way These multiple factors drive how a customer

expe-riences a product and the value or usefulness a customer derives from the product How

then does a company go about creating this value?

Understand how management accountants affect strategic decisions they provide information about the sources of competitive advantage

Decision Point

How do management accountants support strategic decisions?

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Value-Chain Analysis

Value chain is the sequence of business functions in which customer usefulness is added

to products Exhibit 1-2 shows six primary business functions: research and ment, design, production, marketing, distribution, and customer service We illustratethese business functions using Sony Corporation’s television division

develop-1 Research and development (R&D)—Generating and experimenting with ideas related

to new products, services, or processes At Sony, this function includes research onalternative television signal transmission (analog, digital, and high-definition) and onthe clarity of different shapes and thicknesses of television screens

2 Design of products and processes—Detailed planning, engineering, and testing of

products and processes Design at Sony includes determining the number of nent parts in a television set and the effect of alternative product designs on qualityand manufacturing costs Some representations of the value chain collectively refer tothe first two steps as technology development.2

compo-3 Production—Procuring, transporting and storing (also called inbound logistics),

coordinating, and assembling (also called operations) resources to produce a product

or deliver a service Production of a Sony television set includes the procurement andassembly of the electronic parts, the cabinet, and the packaging used for shipping

4 Marketing (including sales)—Promoting and selling products or services to customers

or prospective customers Sony markets its televisions at trade shows, via ments in newspapers and magazines, on the Internet, and through its sales force

advertise-5 Distribution—Processing orders and shipping products or services to customers (also

called outbound logistics) Distribution for Sony includes shipping to retail outlets,catalog vendors, direct sales via the Internet, and other channels through which cus-tomers purchase televisions

6 Customer service—Providing after-sales service to customers Sony provides customer

service on its televisions in the form of customer-help telephone lines, support on theInternet, and warranty repair work

In addition to the six primary business functions, Exhibit 1-2 shows an administrativefunction, which includes functions such as accounting and finance, human resource man-agement, and information technology, that support the six primary business functions.When discussing the value chain in subsequent chapters of the book, we include theadministrative support function within the primary functions For example, included inthe marketing function is the function of analyzing, reporting, and accounting forresources spent in different marketing channels, while the production function includesthe human resource management function of training front-line workers

Each of these business functions is essential to companies satisfying their customers

and keeping them satisfied (and loyal) over time Companies use the term customer

relationship management (CRM) to describe a strategy that integrates people and

tech-nology in all business functions to deepen relationships with customers, partners, anddistributors CRM initiatives use technology to coordinate all customer-facing activities

Learning

Objective 3

Describe the set of

business functions in

the value chain and

identify the dimensions

achieve cost and

efficiency, quality, time,

and innovation

2M Porter, Competitive Advantage (New York: Free Press, 1985).

Exhibit 1-2 Different Parts of the Value Chain

Research and Development

Design of Products and Processes

Service

Administration

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VALUE CHAIN AND SUPPLY CHAIN ANALYSIS AND KEY SUCCESS FACTORS 䊉 29

(such as marketing, sales calls, distribution, and post sales support) and the design and

production activities necessary to get products to customers

At different times and in different industries, one or more of these functions is more

critical than others For example, a company developing an innovative new product or

operating in the pharmaceutical industry, where innovation is the key to profitability, will

emphasize R&D and design of products and processes A company in the consumer goods

industry will focus on marketing, distribution, and customer service to build its brand

Exhibit 1-2 depicts the usual order in which different business-function activities

physically occur Do not, however, interpret Exhibit 1-2 as implying that managers should

proceed sequentially through the value chain when planning and managing their

activi-ties Companies gain (in terms of cost, quality, and the speed with which new products are

developed) if two or more of the individual business functions of the value chain work

concurrently as a team For example, inputs into design decisions by production,

market-ing, distribution, and customer service managers often lead to design choices that reduce

total costs of the company

Managers track the costs incurred in each value-chain category Their goal is to

reduce costs and to improve efficiency Management accounting information helps

man-agers make cost-benefit tradeoffs For example, is it cheaper to buy products from outside

vendors or to do manufacturing in-house? How does investing resources in design and

manufacturing reduce costs of marketing and customer service?

Supply-Chain Analysis

The parts of the value chain associated with producing and delivering a product or

service—production and distribution—is referred to as the supply chain Supply chain

describes the flow of goods, services, and information from the initial sources of

materi-als and services to the delivery of products to consumers, regardless of whether those

activities occur in the same organization or in other organizations Consider Coke and

Pepsi, for example; many companies play a role in bringing these products to consumers

Exhibit 1-3 presents an overview of the supply chain Cost management emphasizes

inte-grating and coordinating activities across all companies in the supply chain, to improve

performance and reduce costs Both the Coca-Cola Company and Pepsi Bottling Group

require their suppliers (such as plastic and aluminum companies and sugar refiners) to

frequently deliver small quantities of materials directly to the production floor to reduce

materials-handling costs Similarly, to reduce inventory levels in the supply chain,

Wal-Mart is asking its suppliers, such as Coca-Cola, to be responsible for and to manage

inventory at both the Coca-Cola warehouse and Wal-Mart

Key Success Factors

Customers want companies to use the value chain and supply chain to deliver ever

improving levels of performance regarding several (or even all) of the following:

䊏 Cost and efficiency—Companies face continuous pressure to reduce the cost of the

products they sell To calculate and manage the cost of products, managers must

first understand the tasks or activities (such as setting up machines or distributing

Distribution Company

Retail Company

Final Consumer

Suppliers of Non-Concentrate Materials/Services

Exhibit 1-3 Supply Chain for a Cola Bottling Company

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products) that cause costs to arise They must also monitor the marketplace todetermine prices that customers are willing to pay for products or services.Management accounting information helps managers calculate a target cost for aproduct by subtracting the operating income per unit of product that the companydesires to earn from the “target price.” To achieve the target cost, managers elimi-nate some activities (such as rework) and reduce the costs of performing activities inall value-chain functions—from initial R&D to customer service.

Increased global competition places ever-increasing pressure on companies tolower costs Many U.S companies have cut costs by outsourcing some of their busi-ness functions Nike, for example, has moved its manufacturing operations to Chinaand Mexico Microsoft and IBM are increasingly doing their software development inSpain, eastern Europe, and India

(TQM) aims to improve operations throughout the value chain and to deliver ucts and services that exceed customer expectations Using TQM, companies designproducts or services to meet the needs and wants of customers and make theseproducts with zero (or very few) defects and waste, and minimal inventories.Managers use management accounting information to evaluate the costs and rev-enue benefits of TQM initiatives

takes for new products to be created and brought to market The increasing pace oftechnological innovation has led to shorter product life cycles and more rapid intro-duction of new products To make product and design decisions, managers need tounderstand the costs and benefits of a product over its life cycle

Customer-response time describes the speed at which an organization responds

to customer requests To increase customer satisfaction, organizations need toreduce delivery time and reliably meet promised delivery dates The primary cause ofdelays is bottlenecks that occur when the work to be performed on a machine, forexample, exceeds available capacity To deliver the product on time, managers need

to increase the capacity of the machine to produce more output Managementaccounting information helps managers quantify the costs and benefits of relievingbottleneck constraints

䊏 Innovation—A constant flow of innovative products or services is the basis for

ongo-ing company success Managers rely on management accountongo-ing information to uate alternative investment and R&D decisions

eval-Companies are increasingly applying the key success factors of cost and efficiency,quality, time, and innovation to promote sustainability—the development and imple-mentation of strategies to achieve long-term financial, social, and environmental per-formance For example, the Japanese copier company Ricoh’s sustainability effortsaggressively focus on energy conservation, resource conservation, product recycling,and pollution prevention By designing products that can be easily recycled, Ricohsimultaneously improves efficiency, cost, and quality Interest in sustainabilityappears to be intensifying Already, government regulations, in countries such asChina and India, are impelling companies to develop and report on their sustainabil-ity initiatives

Management accountants help managers track performance of competitors on the

key success factors Competitive information serves as a benchmark and alerts managers

to market changes Companies are always seeking to continuously improve their

opera-tions These improvements include on-time arrival for Southwest Airlines, customeraccess to online auctions at eBay, and cost reduction on housing products at Lowes.Sometimes, more-fundamental changes in operations, such as redesigning a manufactur-ing process to reduce costs, may be necessary However, successful strategy implementa-tion requires more than value-chain and supply-chain analysis and execution of keysuccess factors It is the decisions that managers make that help them to develop, inte-grate, and implement their strategies

Decision

Point

How do companies

add value, and what

are the dimensions

of performance that

customers are

expecting of

companies?

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DECISION MAKING, PLANNING, AND CONTROL: THE FIVE-STEP DECISION-MAKING PROCESS 䊉 31

Decision Making, Planning, and Control: The

Five-Step Decision-Making Process

We illustrate a five-step decision-making process using the example of the Daily News, a

newspaper in Boulder, Colorado Subsequent chapters of the book describe how

man-agers use this five-step decision-making process to make many different types of decisions

The Daily News differentiates itself from its competitors based on in-depth analyses of

news by its highly rated journalists, use of color to enhance attractiveness to readers and

advertisers, and a Web site that delivers up-to-the-minute news, interviews, and analyses It

has substantial capabilities to deliver on this strategy, such as an automated,

computer-integrated, state-of-the-art printing facility; a Web-based information technology

infra-structure; and a distribution network that is one of the best in the newspaper industry

To keep up with steadily increasing production costs, Naomi Crawford, the manager

of the Daily News, needs to increase revenues To decide what she should do, Naomi

works through the five-step decision-making process

1 Identify the problem and uncertainties Naomi has two main choices:

a Increase the selling price of the newspaper, or

b increase the rate per page charged to advertisers

The key uncertainty is the effect on demand of any increase in prices or rates A decrease

in demand could offset any increase in prices or rates and lead to lower overall revenues

2 Obtain information Gathering information before making a decision helps managers

gain a better understanding of the uncertainties Naomi asks her marketing manager to

talk to some representative readers to gauge their reaction to an increase in the

news-paper’s selling price She asks her advertising sales manager to talk to current and

potential advertisers to assess demand for advertising She also reviews the effect that

past price increases had on readership Ramon Sandoval, the management accountant

at the Daily News, presents information about the impact of past increases or decreases

in advertising rates on advertising revenues He also collects and analyzes information

on advertising rates charged by competing newspapers and other media outlets

3 Make predictions about the future On the basis of this information, Naomi makes

predictions about the future She concludes that increasing prices would upset readers

and decrease readership She has a different view about advertising rates She expects

a market-wide increase in advertising rates and believes that increasing rates will have

little effect on the number of advertising pages sold

Naomi recognizes that making predictions requires judgment She looks for

biases in her thinking Has she correctly judged reader sentiment or is the negative

publicity of a price increase overly influencing her decision making? How sure is she

that competitors will increase advertising rates? Is her thinking in this respect biased

by how competitors have responded in the past? Have circumstances changed? How

confident is she that her sales representatives can convince advertisers to pay higher

rates? Naomi retests her assumptions and reviews her thinking She feels comfortable

with her predictions and judgments

4 Make decisions by choosing among alternatives When making decisions, strategy is a

vital guidepost; many individuals in different parts of the organization at different

times make decisions Consistency with strategy binds individuals and timelines

together and provides a common purpose for disparate decisions Aligning decisions

with strategy enables an organization to implement its strategy and achieve its goals

Without this alignment, decisions will be uncoordinated, pull the organization in

dif-ferent directions, and produce inconsistent results

Consistent with the product differentiation strategy, Naomi decides to increase

advertising rates by 4% to $5,200 per page in March 2011 She is confident that the

Daily News’s distinctive style and Web presence will increase readership, creating

value for advertisers She communicates the new advertising rate schedule to the

sales department Ramon estimates advertising revenues of $4,160,000 ($5,200 per

page 800 pages predicted to be sold in March 2011)

Explain the five-step decision-making process identify the problem and uncertainties, obtain information, make predictions about the future, make decisions

by choosing among alternatives, implement the decision, evaluate performance, and learn and its role in management accounting planning and control of operations and activities

Trang 33

Steps 1 through 4 are collectively referred to as planning Planning comprises selecting

organization goals and strategies, predicting results under various alternative ways ofachieving those goals, deciding how to attain the desired goals, and communicating thegoals and how to achieve them to the entire organization Management accountants serve

as business partners in these planning activities because of their understanding of whatcreates value and the key success factors

The most important planning tool when implementing strategy is a budget A

budget is the quantitative expression of a proposed plan of action by management and

is an aid to coordinating what needs to be done to execute that plan For March 2011,budgeted advertising revenue equals $4,160,000 The full budget for March 2011includes budgeted circulation revenue and the production, distribution, and customer-service costs to achieve sales goals; the anticipated cash flows; and the potential financ-ing needs Because the process of preparing a budget crosses business functions, it forcescoordination and communication throughout the company, as well as with the com-pany’s suppliers and customers

5 Implement the decision, evaluate performance, and learn Managers at the Daily

News take actions to implement the March 2011 budget Management

account-ants collect information to follow through on how actual performance compares

to planned or budgeted performance (also referred to as scorekeeping)

Information on actual results is different from the pre-decision planning

informa-tion Naomi collected in Step 2, which enabled her to better understand ties, to make predictions, and to make a decision The comparison of actual

uncertain-performance to budgeted uncertain-performance is the control or post-decision role of

infor-mation Control comprises taking actions that implement the planning decisions,

deciding how to evaluate performance, and providing feedback and learning tohelp future decision making

Measuring actual performance informs managers how well they and their units are doing Linking rewards to performance helps motivate managers Theserewards are both intrinsic (recognition for a job well-done) and extrinsic (salary,bonuses, and promotions linked to performance) A budget serves as much as a con-trol tool as a planning tool Why? Because a budget is a benchmark against whichactual performance can be compared

sub-Consider performance evaluation at the Daily News During March 2011, the newspaper

sold advertising, issued invoices, and received payments These invoices and receipts were

recorded in the accounting system Exhibit 1-4 shows the Daily News’s performance

report of advertising revenues for March 2011 This report indicates that 760 pages ofadvertising (40 pages fewer than the budgeted 800 pages) were sold The average rate perpage was $5,080, compared with the budgeted $5,200 rate, yielding actual advertisingrevenues of $3,860,800 The actual advertising revenues were $299,200 less than thebudgeted $4,160,000 Observe how managers use both financial and nonfinancial infor-mation, such as pages of advertising, to evaluate performance

The performance report in Exhibit 1-4 spurs investigation and learning Learning is

examining past performance (the control function) and systematically exploring alternativeways to make better-informed decisions and plans in the future Learning can lead to changes

in goals, changes in strategies, changes in the ways decision alternatives are identified,

Difference: Difference as a Actual Budgeted (Actual Result − Percentage of Result Amount Budgeted Amount) Budgeted Amount

Advertising pages sold 760 pages 800 pages 40 pages Unfavorable 5.0% Unfavorable

Advertising revenues $3,860,800 $4,160,000 $299,200 Unfavorable 7.2% Unfavorable

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KEY MANAGEMENT ACCOUNTING GUIDELINES 䊉 33

changes in the range of information collected when making predictions, and sometimes

changes in managers

The performance report in Exhibit 1-4 would prompt the management accountant to

raise several questions directing the attention of managers to problems and opportunities

Is the strategy of differentiating the Daily News from other newspapers attracting more

readers? In implementing the new advertising rates, did the marketing and sales

depart-ment make sufficient efforts to convince advertisers that, even with the higher rate of

$5,200 per page, advertising in the Daily News was a good buy? Why was the actual

average rate per page $5,080 instead of the budgeted rate of $5,200? Did some sales

rep-resentatives offer discounted rates? Did economic conditions cause the decline in

advertis-ing revenues? Are revenues falladvertis-ing because editorial and production standards have

declined? Answers to these questions could prompt the newspaper’s publisher to take

sub-sequent actions, including, for example, adding more sales personnel or making changes

in editorial policy Good implementation requires the marketing, editorial, and

produc-tion departments to work together and coordinate their acproduc-tions

The management accountant could go further by identifying the specific advertisers

that cut back or stopped advertising after the rate increase went into effect Managers could

then decide when and how sales representatives should follow-up with these advertisers

The left side of Exhibit 1-5 provides an overview of the decision-making processes at

the Daily News The right side of the exhibit highlights how the management accounting

system aids in decision making

Key Management Accounting Guidelines

Three guidelines help management accountants provide the most value to their companies in

strategic and operational decision making: Employ a cost-benefit approach, give full

recogni-tion to behavioral and technical considerarecogni-tions, and use different costs for different purposes

Example of Management Decision Making

at Daily News

Management Accounting System Budgets

CONTROL

• Expected advertising pages sold, rate per page, and revenue

Accounting System

Financial representation

of plans

Recording transactions and classifying them in accounting records

• Source documents (invoices to advertisers indicating pages sold, rate per page, and payments received)

• Recording in general and subsidiary ledgers

Performance Reports

Reports comparing actual results

to budgets

• Comparing actual advertising pages sold, average rate per page, and revenue to budgeted amounts

Implement the Decision

• Implement a 4%

increase in

advertising rates

Evaluate Performance and Learn

• Identify the Problem and Uncertainties

How to increase revenues

• Obtain Information

• Make Predictons About the Future

• Make Decisions by Choosing Among

Alternatives

Increase advertising rates by 4%

How Accounting Aids Decision Making, Planning, and Control

at the Daily News

Exhibit 1-5

Decision Point

How do managers make decisions to implement strategy?

Describe three guidelines management accountants follow in supporting managers employing a cost- benefit approach, recognizing behavioral

as well as technical considerations, and calculating different costs for different purposes

Trang 35

Cost-Benefit Approach

Managers continually face resource-allocation decisions, such as whether to purchase

a new software package or hire a new employee They use a cost-benefit approach

when making these decisions: Resources should be spent if the expected benefits to thecompany exceed the expected costs Managers rely on management accounting infor-mation to quantify expected benefits and expected costs although all benefits and costsare not easy to quantify Nevertheless, the cost-benefit approach is a useful guide formaking resource-allocation decisions

Consider the installation of a company’s first budgeting system Previously, the pany used historical recordkeeping and little formal planning A major benefit ofinstalling a budgeting system is that it compels managers to plan ahead, compare actual tobudgeted information, learn, and take corrective action These actions lead to differentdecisions that improve performance relative to decisions that would have been madeusing the historical system, but the benefits are not easy to measure On the cost side,some costs, such as investments in software and training are easier to quantify Others,such as the time spent by managers on the budgeting process, are harder to quantify.Regardless, senior managers compare expected benefits and expected costs, exercise judg-ment, and reach a decision, in this case to install the budgeting system

com-Behavioral and Technical Considerations

The cost-benefit approach is the criterion that assists managers in deciding whether, say, toinstall a proposed budgeting system instead of continuing to use an existing historical system

In making this decision senior managers consider two simultaneous missions: one technicaland one behavioral The technical considerations help managers make wise economic deci-sions by providing them with the desired information (for example, costs in various value-chain categories) in an appropriate format (such as actual results versus budgeted amounts)and at the preferred frequency Now consider the human (the behavioral) side of why budg-eting is used Budgets induce a different set of decisions within an organization because ofbetter collaboration, planning, and motivation The behavioral considerations encouragemanagers and other employees to strive for achieving the goals of the organization

Both managers and management accountants should always remember that agement is not confined exclusively to technical matters Management is primarily ahuman activity that should focus on how to help individuals do their jobs better—forexample, by helping them to understand which of their activities adds value and whichdoes not Moreover, when workers underperform, behavioral considerations suggestthat management systems and processes should cause managers to personally discusswith workers ways to improve performance rather than just sending them a report high-lighting their underperformance

man-Different Costs for man-Different Purposes

This book emphasizes that managers use alternative ways to compute costs in differentdecision-making situations, because there are different costs for different purposes Acost concept used for the external-reporting purpose of accounting may not be an appro-priate concept for internal, routine reporting to managers

Consider the advertising costs associated with Microsoft Corporation’s launch of amajor product with a useful life of several years For external reporting to shareholders,television advertising costs for this product are fully expensed in the income statement inthe year they are incurred GAAP requires this immediate expensing for external report-ing For internal purposes of evaluating management performance, however, the televi-sion advertising costs could be capitalized and then amortized or written off as expensesover several years Microsoft could capitalize these advertising costs if it believes doing soresults in a more accurate and fairer measure of the performance of the managers thatlaunched the new product

We now discuss the relationships and reporting responsibilities among managers andmanagement accountants within a company’s organization structure

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ORGANIZATION STRUCTURE AND THE MANAGEMENT ACCOUNTANT 䊉 35

Organization Structure and the Management

Accountant

We focus first on broad management functions and then look at how the management

accounting and finance functions support managers

Line and Staff Relationships

Organizations distinguish between line management and staff management Line

management, such as production, marketing, and distribution management, is

directly responsible for attaining the goals of the organization For example,

man-agers of manufacturing divisions may target particular levels of budgeted operating

income, certain levels of product quality and safety, and compliance with

environmen-tal laws Similarly, the pediatrics department in a hospienvironmen-tal is responsible for quality of

service, costs, and patient billings Staff management, such as management

account-ants and information technology and human-resources management, provides advice,

support, and assistance to line management A plant manager (a line function) may be

responsible for investing in new equipment A management accountant (a staff

func-tion) works as a business partner of the plant manager by preparing detailed

operating-cost comparisons of alternative pieces of equipment

Increasingly, organizations such as Honda and Dell are using teams to achieve their

objectives These teams include both line and staff management so that all inputs into a

decision are available simultaneously

The Chief Financial Officer and the Controller

The chief financial officer (CFO)—also called the finance director in many countries—is

the executive responsible for overseeing the financial operations of an organization The

responsibilities of the CFO vary among organizations, but they usually include the

fol-lowing areas:

䊏 Controllership—includes providing financial information for reports to managers

and shareholders, and overseeing the overall operations of the accounting system

䊏 Treasury—includes banking and short- and long-term financing, investments, and

cash management

exchange-rate changes and derivatives management

䊏 Taxation—includes income taxes, sales taxes, and international tax planning

䊏 Investor relations—includes communicating with, responding to, and interacting

with shareholders

䊏 Internal audit—includes reviewing and analyzing financial and other records to attest

to the integrity of the organization’s financial reports and to adherence to its policies

and procedures

The controller (also called the chief accounting officer) is the financial executive primarily

responsible for management accounting and financial accounting This book focuses on

the controller as the chief management accounting executive Modern controllers do not

do any controlling in terms of line authority except over their own departments Yet the

modern concept of controllership maintains that the controller exercises control in a

spe-cial sense By reporting and interpreting relevant data, the controller influences the

behav-ior of all employees and exerts a force that impels line managers toward making

better-informed decisions as they implement their strategies

Exhibit 1-6 is an organization chart of the CFO and the corporate controller at Nike,

the leading footwear and apparel company The CFO is a staff manager who reports to

and supports the chief executive officer (CEO) As in most organizations, the corporate

controller at Nike reports to the CFO Nike also has regional controllers who support

regional managers in the major geographic regions in which the company operates, such

Understand how management accounting fits into an organization’s structure for example, the responsibilities of the controller

Trang 37

as the United States, Asia Pacific, Latin America, and Europe Individual countries times have a country controller Organization charts such as the one in Exhibit 1-6 showformal reporting relationships In most organizations, there also are informal relation-ships that must be understood when managers attempt to implement their decisions.Examples of informal relationships are friendships among managers (friendships of a pro-fessional or personal kind) and the personal preferences of top management about themanagers they rely on in decision making.

some-Ponder what managers do to design and implement strategies and the organizationstructures within which they operate Then think about the management accountants’and controllers’ roles It should be clear that the successful management accountant must

have technical and analytical competence as well as behavioral and interpersonal skills.

The Concepts in Action box on page 37 describes some desirable values and behaviorsand why they are so critical to the partnership between management accountants andmanagers We will refer to these values and behaviors as we discuss different topics insubsequent chapters of this book

Professional Ethics

At no time has the focus on ethical conduct been sharper than it is today Corporatescandals at Enron, WorldCom, and Arthur Andersen have seriously eroded the public’sconfidence in corporations All employees in a company, whether in line management orstaff management, must comply with the organization’s—and more broadly, society’s—expectations of ethical standards

Institutional Support

Accountants have special obligations regarding ethics, given that they are responsible forthe integrity of the financial information provided to internal and external parties TheSarbanes–Oxley legislation in the United States, passed in 2002 in response to a series ofcorporate scandals, focuses on improving internal control, corporate governance, moni-toring of managers, and disclosure practices of public corporations These regulationscall for tough ethical standards on managers and accountants and provide a process foremployees to report violations of illegal and unethical acts

Chief Financial Officer (CFO)

Examples of Functions

Global Financial Planning/Budgeting Operations Administration

Profitability Reporting Inventory

Royalties General Ledger Accounts Payable and Receivable Subsidiary and Liaison Accounting

Chief Executive Officer (CEO)

Management

Relations

Strategic Planning

Board of Directors

Internal Audit

Nike: Reporting

Relationship for the

CFO and the Corporate

Trang 38

Working in cross-functional teams and as a business partner of managers.

It is not enough that management accountants simply be technically petent in their area of study They also need to be able to work in teams, to learn about business issues, to understand the motivations of different individuals, to respect the views of their col-

com-leagues, and to show empathy and trust.

Promoting fact-based analysis and making tough-minded, critical judgments without being adversarial Management

accountants must raise tough questions for managers to consider, especially when preparing budgets They must do

so thoughtfully and with the intent of improving plans and decisions In the case of Washington Mutual’s bank ure, management accountants should have raised questions about whether the company’s risky mortgage lending

fail-would be profitable if housing prices declined.

Leading and motivating people to change and be innovative Implementing new ideas, however good they may be, is

seldom easy When the United States Department of Defense sought to consolidate more than 320 finance and

accounting systems into a centralized platform, the accounting services director and his team of management

accountants made sure that the vision for change was well understood throughout the agency Ultimately, each vidual’s performance was aligned with the transformative change and incentive pay was introduced to promote adop- tion and drive innovation within this new framework.

indi-Communicating clearly, openly, and candidly indi-Communicating information is a large part of a management

accoun-tant’s job A few years ago, Pitney Bowes Inc (PBI), a $4 billion global provider of integrated mail and document

management solutions, implemented a reporting initiative to give managers feedback in key areas The initiative ceeded because it was clearly designed and openly communicated by PBI’s team of management accountants.

suc-Having a strong sense of integrity Management accountants must never succumb to pressure from managers to

manipulate financial information They must always remember that their primary commitment is to the organization and its shareholders At WorldCom, under pressure from senior managers, members of the accounting staff concealed billions of dollars in expenses Because the accounting staff lacked the integrity and courage to stand up to and report corrupt senior managers, WorldCom landed in bankruptcy Some members of the accounting staff and the senior

executive team served prison terms for their actions.

Sources: Dash, Eric and Andrew Ross Sorkin 2008 Government seizes WaMu and sells some assets New York Times, September 25 http://www.nytimes.

com/2008/09/26/business/26wamu.html; Garling, Wendy 2007 Winning the Transformation Battle at the Defense Finance and Accounting Service.

Balanced Scorecard Report, May–June http://cb.hbsp.harvard.edu/cb/web/product_detail.seam?R=B0705C-PDF-ENG; Gollakota, Kamala and Vipin

Gupta 2009 WorldCom Inc.: What went wrong Richard Ivey School of Business Case No 905M43 London, ON: The University of Western Ontario.

http://cb.hbsp.harvard.edu/cb/web/product_detail.seam?R=905M43-PDF-ENG; Green, Mark, Jeannine Garrity, Andrea Gumbus, and Bridget Lyons 2002.

Pitney Bowes Calls for New Metrics Strategic Finance, May http://www.allbusiness.com/accounting-reporting/reports-statements-profit/189988-1.html

Concepts in Action

3 See Appendix C: Cost Accounting in Professional Examinations in MyAccountingLab and at www.pearsonglobaleditions.com/

horngren for a list of professional management accounting organizations in the United States, Canada, Australia, Japan, and

the United Kingdom.

Professional accounting organizations, which represent management accountants in

many countries, promote high ethical standards.3 Each of these organizations provides

certification programs indicating that the holder has demonstrated the competency of

technical knowledge required by that organization in management accounting and

finan-cial management, respectively

In the United States, the Institute of Management Accountants (IMA) has also issued

ethical guidelines Exhibit 1-7 presents the IMA’s guidance on issues relating to competence,

Trang 39

Practitioners of management accounting and financial management have an obligation to the public, their profession, the organizations they serve, and themselves to maintain the highest standards of ethical conduct In recognition of this obligation, the Institute of Management Accountants has promulgated the following standards of ethical professional practice Adherence to these standards, both domestically and internationally, is integral to achieving the Objectives of Management Account- ing Practitioners of management accounting and financial management shall not commit acts contrary

to these standards nor shall they condone the commission of such acts by others within their organizations.

IMA STATEMENT OF ETHICAL PROFESSIONAL PRACTICE

Practitioners of management accounting and financial management shall behave ethically A ment to ethical professional practice includes overarching principles that express our values and standards that guide our conduct.

commit-PRINCIPLES

IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility

Practitioners shall act in accordance with these principles and shall encourage others within their organizations to adhere to them.

STANDARDS

A practitioner’s failure to comply with the following standards may result in disciplinary action.

COMPETENCE

Each practitioner has a responsibility to:

1 Maintain an appropriate level of professional expertise by continually developing knowledge and skills.

2 Perform professional duties in accordance with relevant laws, regulations, and technical standards.

3 Provide decision support information and recommendations that are accurate, clear, concise, and timely.

4 Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.

CONFIDENTIALITY

1 Keep information confidential except when disclosure is authorized or legally required.

2 Inform all relevant parties regarding appropriate use of confidential information Monitor subordi- nates’ activities to ensure compliance.

3 Refrain from using confidential information for unethical or illegal advantage.

INTEGRITY

1 Mitigate actual conflicts of interest Regularly communicate with business associates to avoid apparent conflicts of interest Advise all parties of any potential conflicts.

2 Refrain from engaging in any conduct that would prejudice carrying out duties ethically.

3 Abstain from engaging in or supporting any activity that might discredit the profession.

CREDIBILITY

1 Communicate information fairly and objectively.

2 Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.

3 Disclose delays or deficiencies in information, timeliness, processing, or internal controls in formance with organization policy and/or applicable law.

con-Source: Statement on Management Accounting Number 1-C 2005 IMA Statement of Ethical Professional Practice.

Montvale, NJ: Institute of Management Accountants Reprinted with permission from the Institute of Management Accountants, Montvale, NJ, www.imanet.org.

Ethical Behavior for

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PROFESSIONAL ETHICS 䊉 39

confidentiality, integrity, and credibility To provide support to its members to act

ethi-cally at all times, the IMA runs an ethics hotline service Members can call professional

counselors at the IMA’s Ethics Counseling Service to discuss their ethical dilemmas The

counselors help identify the key ethical issues and possible alternative ways of resolving

them, and confidentiality is guaranteed The IMA is just one of many institutions that

help navigate management accountants through what could be turbulent ethical waters

Typical Ethical Challenges

Ethical issues can confront management accountants in many ways Here are two examples:

䊏 Case A: A division manager has concerns about the commercial potential of a

soft-ware product for which development costs are currently being capitalized as an

asset rather than being shown as an expense for internal reporting purposes The

manager’s bonus is based, in part, on division profits The manager argues that

showing development costs as an asset is justified because the new product will

gen-erate profits but presents little evidence to support his argument The last two

prod-ucts from this division have been unsuccessful The management accountant

disagrees but wants to avoid a difficult personal confrontation with the boss, the

division manager

䊏 Case B: A packaging supplier, bidding for a new contract, offers the management

accountant of the purchasing company an all-expenses-paid weekend to the Super

Bowl The supplier does not mention the new contract when extending the invitation

The accountant is not a personal friend of the supplier The accountant knows cost

issues are critical in approving the new contract and is concerned that the supplier

will ask for details about bids by competing packaging companies

In each case the management accountant is faced with an ethical dilemma Case A

involves competence, credibility, and integrity The management accountant should

request that the division manager provide credible evidence that the new product is

com-mercially viable If the manager does not provide such evidence, expensing development

costs in the current period is appropriate Case B involves confidentiality and integrity

Ethical issues are not always clear-cut The supplier in Case B may have no intention

of raising issues associated with the bid However, the appearance of a conflict of interest

in Case B is sufficient for many companies to prohibit employees from accepting “favors”

from suppliers Exhibit 1-8 presents the IMA’s guidance on “Resolution of Ethical

Conflict.” The accountant in Case B should discuss the invitation with his or her

immedi-ate supervisor If the visit is approved, the accountant should inform the supplier that the

In applying the Standards of Ethical Professional Practice, you may encounter problems identifying

unethical behavior or resolving an ethical conflict When faced with ethical issues, you should follow your

organization’s established policies on the resolution of such conflict If these policies do not resolve the

ethical conflict, you should consider the following courses of action:

1 Discuss the issue with your immediate supervisor except when it appears that the supervisor is

involved In that case, present the issue to the next level If you cannot achieve a satisfactory

resolution, submit the issue to the next management level If your immediate superior is the chief

executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit

committee, executive committee, board of directors, board of trustees, or owners Contact with levels

above the immediate superior should be initiated only with your superior’s knowledge, assuming he or

she is not involved Communication of such problems to authorities or individuals not employed or

engaged by the organization is not considered appropriate, unless you believe there is a clear

violation of the law.

2 Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or

other impartial advisor to obtain a better understanding of possible courses of action.

3 Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

Source: Statement on Management Accounting Number 1-C 2005 IMA Statement of Ethical Professional Practice Montvale,

NJ: Institute of Management Accountants Reprinted with permission from the Institute of Management Accountants,

Montvale, NJ, www.imanet.org.

Resolution of Ethical Conflict

Exhibit 1-8

Tiêu đề	Cost Accounting A Managerial Emphasis
Tác giả	Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan
Trường học	Stanford University
Chuyên ngành	Cost Accounting
Thể loại	sách
Năm xuất bản	2012
Thành phố	Boston

Định dạng
Số trang	893
Dung lượng	9,35 MB