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Cost Management A Strategic Stra ate egic Emphasis Emp pha asiis Edward J Blocher David E Stout Seventh Edition Paul E Juras Gary Cokins Cost Management A Strategic Emphasis Cost Management A Strategic Emphasis Seventh Edition Edward J Blocher University of North Carolina at Chapel Hill Kenan-Flagler Business School David E Stout Youngstown State University Williamson College of Business Administration Paul E Juras Babson College Accountancy and Law Divison Gary Cokins Analytics-Based Performance Management, LLC Cary, North Carolina COST MANAGEMENT: A STRATEGIC EMPHASIS, SEVENTH EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2016 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2013, 2010, and 2008 No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper DOW/DOW ISBN 978-0-07-773377-3 MHID 0-07-773377-0 Senior Vice President, Products & Markets: Kurt L Strand Vice President, General Manager, Products & Markets: Marty Lange Vice President, Content Design & Delivery: Kimberly Meriwether David Managing Director: Tim Vertovec Marketing Director: Brad Parkins Brand Manager: Nichole Pullen Director, Product Development: Rose Koos Director of Digital Content: Patricia Plumb Lead Product Developer: Ann Torbert Product Developer: Danielle Andries/Erin Quinones Marketing Manager: Cheryl Osgood Digital Product Developer: Kevin Moran Digital Product Analyst: Xin Lin Director, Content Design & Delivery: Linda Avenarius Program Manager: Daryl Horrocks Content Project Managers: Dana Pauley/Angela Norris Buyer: Jennifer Pickel Design: Matt Diamond Content Licensing Specialist: Rita Hingtgen Cover Image: Strategy: Dominick Pabis/Getty Images Sustainable: PagaDesign/Getty Images Service: Amriphoto/Getty Images Ethics: DNY59/Getty Images International: © Ocean/Corbis Compositor: MPS Limited Printer: R R Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Blocher, Edward Cost management : a strategic emphasis / Edward J Blocher, David E Stout, Paul E Juras, Gary Cokins.—Seventh edition pages cm ISBN 978-0-07-773377-3 (alk paper) Cost accounting Managerial accounting I Title HF5686.C8B559 2015 658.15'52—dc23 2015011385 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites www.mhhe.com We dedicate this edition  .  To my wife, Sandy, and our sons, Joseph and David, and to my mentor, R Lee Brummet Ed Blocher To my wife, Anne, and our sons, David and Kevin David Stout To my wife, Colleen, and my children, Stephen and Kate Paul Juras To my wife, Pam Tower, and my mentor, Robert A Bonsack—–a true craftsman in the field of cost management Gary Cokins Meet the Authors Edward J Blocher is adjunct professor of accounting at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill His undergraduate degree (economics) is from Rice University, his MBA from Tulane University, and his Ph.D from the University of Texas at Austin Professor Blocher presents regularly on strategic cost management at the national meetings of both the American Accounting Association (AAA) and the Institute of Management Accountants (IMA) While he is involved in a number of accounting organizations, Professor Blocher has been most continually active in the IMA, where he has been a member of the IMA’s Research Foundation He is a certified management accountant (CMA), has taught review courses for the CMA exam, and has served on the IMA’s national education committee Professor Blocher is also the author or co-author of several articles in management accounting and in other areas of accounting and has served as associate editor and reviewer for a number of accounting journals Recently he published an article in Issues in Accounting Education on the topic of teaching strategic cost management Putting research and teaching into practice is important to Professor Blocher, who has worked closely with other firms and organizations in developing products, publications, and teaching materials He was a member of the task force for the IMA that developed a new definition of management accounting in 2008 From 2010–2014, he served as a member of the joint curriculum task force of the Management Accounting Section (MAS) of the AAA and the IMA, which was charged with the responsibility of developing curriculum recommendations for accounting education The task force has two recent publications in Issues in Accounting Education Also, he has provided expert testimony and has consulted with a number of organizations regarding cost management matters David E Stout is the John S and Doris M Andrews Professor of Accounting, Williamson vi College of Business Administration, Youngstown State University Previously, he held the position of the John M Cooney Professor of Accounting, School of Business, Villanova University David earned his Ph.D in accounting (1982) from the Katz Graduate School of Business, University of Pittsburgh, and teaches in the cost/managerial accounting area He served previously as editor of Issues in Accounting Education and as editor-in-chief of the Journal of Accounting Education He currently serves as a member of the editorial board of each of the following journals: China Finance and Accounting Review; IMA Educational Case Journal; and Management Accounting Quarterly/Strategic Finance Professor Stout has published over 90 articles in numerous professional and academic journals, including Advances in Accounting Education, Issues in Accounting Education, the Journal of Accounting Education, The Accounting Educators’ Journal, Advances in International Accounting, Behavioral Research in Accounting (BRIA), The CPA Journal, Educational and Psychological Measurement, the IMA Educational Case Journal, Managerial Finance, Management Accounting, Management Accounting Quarterly, Financial Practice and Education, Strategic Finance, and Advances in Accounting David is past president of the Teaching, Learning & Curriculum (TLC) Section of the AAA, past president of the Academy of Business Education (ABE), and past president of the Ohio Region, American Accounting Association (AAA) During the period 2011–2014, he served as a member of the AAA Board of Directors In 2007, he was the recipient of the R Lee Brummet Award for Distinguished Accounting Educators, Institute of Management Accountants (IMA), and the recipient of the Ohio Outstanding Accounting Educator Award, which is cosponsored by the Ohio Society of CPAs and the AAA’s Ohio Region In 2008, David received the Distinguished Achievement in Accounting Education Award from the AICPA and the Distinguished Service Award for Educators given by the IMA Also in 2008, David was inducted into the Hall of Honor, TLC Section of the AAA and was selected by Ohio Magazine as one of Ohio’s Outstanding College and University Teachers In 2012, he was a co-recipient of the Jim Bulloch Award for Innovations in Management Accounting Education, an award Meet the Authors vii given annually by the Management Accounting Section (MAS) of the AAA and sponsored by the Institute of Management Accountants (IMA) In 2015, Professor Stout was the recipient of the 2015 American Accounting Association (AAA) Outstanding Educator Award From 2010–2014, he served as a member of the joint curriculum task force of the Management Accounting Section (MAS) of the AAA and the IMA, which was charged with the responsibility of developing curricular recommendations for accounting education The task force has two recent publications in Issues in Accounting Education Paul E Juras is the Vander Wolk Professor of Managerial Accounting and Operational Performance and Chair of the Accountancy and Law Division at Babson College Previously he was a professor of accountancy at Wake Forest University He earned both his BBA and MBA at Pace University and his Ph.D from Syracuse University He is a certified management accountant (CMA) and has a certified public accountant (CPA) license from New York Professor Juras has experience in strategic management accounting He has published articles and cases in many journals, including the Journal of Corporate Accounting and Finance, Issues in Accounting Education, The CPA Journal, and Strategic Finance He has made numerous presentations at meetings of both the American Accounting Association (AAA) and the Institute of Management Accountants (IMA) In 2014, he received the IMA’s Lybrand Gold Medal, awarded to the author(s) of the outstanding article of the year published in Strategic Finance, and in 2015 he received the IMA’s R Lee Brummet Award for Distinguished Accounting Educators Professor Juras teaches managerial accounting and strategic cost management courses and has taught in the undergraduate program, the Masters of Science in Accountancy program, and the MBA program at Wake Forest University He has also taught in the undergraduate, the full-time MBA, the evening MBA, and the blended-learning MBA programs at Babson College While he was active in CAM-I, the Consortium for Advanced Management-International, and has served in leadership roles in the Management Accounting Section of the AAA, Professor Juras dedicates most of his efforts outside the classroom to the IMA He is currently a member of the IMA Global Board of Directors and recently served as a Regent of the Institute of Certified Management Accountants, the organization responsible for the CMA certification In addition, Professor Juras served a three-year term as the chair of the IMA Research Foundation and is an associate editor of the IMA Educational Case Journal Gary Cokins is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) improvement methods and business analytics He is the founder of Analytics-Based Performance Management, an advisory firm located in Cary, North Carolina, at www.garycokins.com He received a BS degree with honors in industrial engineering/operations research from Cornell University in 1971 and an MBA from Northwestern University’s Kellogg School of Management in 1974 Gary began his career as a strategic planner with FMC Corporation and then served as a division financial controller and operations manager there In 1981, Gary began his management consulting career first with Deloitte consulting, and then in 1988 with KPMG consulting In 1992, Gary headed the National Cost Management Consulting Services for Electronic Data Systems (EDS), which is now part of Hewlett-Packard (HP) From 1997 until 2013, Gary was in business development with SAS, a leading provider of business analytics software He has authored popular books on activity-based costing, enterprise and corporate performance management (EPM/CPM), supply chain management, cost of quality, and business analytics Gary participates and serves on professional society committees for the AICPA, Chartered Institute of Management Accountants (CIMA), The American Production and Inventory Control Society (APICS), and the Institute for Management Accountants (IMA) For the IMA, he serves as its Executive in Residence Gary is a regular writer and blogger for websites that include www.businessfinancemag com, www.informs.com, www.epmchannel.com, and www.iianalytics.com The Author Team was selected to create a leading book in cost management based on leadership in teaching experience, commitment to learning, and a connection to the profession and practice of management accounting that provides students with up-to-date knowledge of real-world management accounting issues and practices Blocher/Stout/Juras/Cokins Welcome to Students: We have written this book to help you understand the role of cost management in helping an organization succeed Unlike many books that aim to teach you about accounting, we aim to show you how an important area of accounting, cost management, is used by managers to help organizations achieve their goals An important aspect of cost management in our text is the strategic focus By strategy we mean the long-term plan the organization has developed to compete successfully Most organizations strive to achieve a competitive edge through the execution of a specific strategy For some firms it is low cost, and for others it might be high quality, customer service, or some unique feature or attribute of its product or service We know in these competitive times that an organization does not succeed by being ordinary Rather, it develops a strategy that will set it apart from competitors and ensure its attractiveness to customers and other stakeholders into the future The role of cost management is to help management of the organization attain and maintain success through strategy implementation Thus, for every major topic covered in our text there is a larger issue, which is: “How does this organization compete? What type of cost-management information does it need?” We not cover a cost-management method simply to become proficient at it We want you to know why, when, and how the technique is used to help the organization succeed A strategic understanding of cost management today is so important that many senior financial managers and many CPAs—both in public and in private practice—are coming back to school to learn more about strategy, competitive analysis, and new cost-management techniques Knowing how to the accounting alone, no matter how well you it, is by itself no longer sufficient Cost management with a strategic emphasis is one way to enhance your career and to add value to your employer, whatever type of organization it might be Key Text Features that Integrate the Strategy Emphasis REAL-WORLD FOCUS Real-World Focus Cost Management, 7e, provides Globalization, Strategy, and Exchange Rates: The Euro Since January 1999, the euro has been used as the common currency of most European Union (EU) countries For the first 20 months following its introduction, the euro steadily lost about 25% of its value relative to the U.S dollar Due to changing economic circumstances, the euro began to rise in early 2002 and in August 2008 had risen to $1.59 It then fell to a value of $1.26 in March 2009 due in part to falling oil prices and recession pressures in the EU during the fall of 2008 The euro then increased to $1.35 in February 2012 due in part to rising oil prices The euro remained steady at that level from 2012 through August 2014 Since then, the euro has fallen dramatically against the dollar ($1.05 in March 2015) The constant change of the value of the euro relative to the dollar creates three types of strategic issues for U.S and European firms.* extensive real-world examples of how cost management systems can add value to the organization The Real-World Focus boxes throughout the text take real organizations and demonstrate strategy in action and the role that cost management plays in supporting the organization’s strategy income on the financial statements of global companies; for example, the clothing retailer Gap Inc reported a decline of 22% in earnings for 2013 due to a decline in the currencies of the foreign countries where the company operates In sum, companies with a significant global component to their business must plan strategically for dealing with the effects on their business of changing exchange rates *The Economic and Monetary Union (EMU) of Europe has 28 member countries, 19 of which have adopted the European currency, the euro Current and historical values for the exchange rate for the euro vs the U.S dollar and for exchange rates for other currencies are available on the Federal Reserve website: www.federalreserve.gov/releases/H10/hist/ Source: M i A t l “G E i D li 22% H t b F i C To augment this coverage, the Blocher team encourages students to further explore real-world companies through Cost Management in Action boxes that appear throughout the text This feature poses important questions that make students think critically about the relationship between cost management and organizational strategy At the end of each chapter, the authors then supply their comments for the Cost Management in Action boxes Cost Management in Action The Value Chain in Action: Inside the Samsung Phone Samsung Electronics, the South Korean consumer electronics giant, includes six main components in its smartphones: (1) display and touchscreen, (2) memory chip, (3) processor, (4) camera, (5) wireless electronics, and (6) battery Samsung manufactures a wide range of electronic products in addition to the smartphone, including televisions, monitors, tablets, cameras, and a variety of chips Consider the six components of Samsung’s smartphones listed above Which you think are manufactured by Samsung? Which components you think are purchased from other manufacturers? That is, how much does Samsung rely on its own manufacturing in the value chain for its smartphones? Required What strategy (cost leadership or differentiation) you think Samsung uses and why? Apple has a very similar set of components for its smartphones How similar you think the two firms’ value chains are likely to be? Problem Material The Blocher team has taken great care to develop assignment material that effectively reinforces concepts, procedures, and strategic issues presented in each chapter In addition, each chapter has one or more end-of-chapter assignments that focus on ethical issues or that deal with an international context or a service (i.e., nonmanufacturing) setting The authors also include exercises and problems that relate topical coverage to the general issue of sustainability Many chapters have assignments based on readings from periodicals such as Strategic Finance, Management Accounting Quarterly, The Wall Street Journal, and the Harvard Business Review (HBR) These assignments link topical material in the chapter to the broader, strategic issues that organizations face End-of-chapter assignments that embrace a distinguishing focus are identified as follows: bLo33770_ch02_034-065.indd 36 Strategy viii 03/06/15 10:53 AM International Service Ethics Sustainability Helping Students Succeed Using Cost Management, 7e Text Illustrations Clear and concise exhibits help illustrate basic and complicated topics throughout the book EXHIBIT 6.13 Weighted-Average vs FIFO Equivalent Units May June Beginning WIP % Complete Excel Solutions Manual The student version of the Units Completed June Units Started and Finished June Ending WIP WeightedAverage Equivalent Units FIFO Equivalent Units Excel Solutions Manual has been revised and updated for the seventh edition This unique supplement consists of an Excel workbook for each chapter, as described more fully next % Complete July The student version of the Excel Solutions Manual contains for every end-of-chapter exercise and problem in the text background information and data As well, a worked-out solution is provided for half of the exercises and problems Because all pertinent information for each exercise and problem, including background information and data, is included in each worksheet, the Excel Solutions Manual is self-contained and easy to use In short, the student version of the Excel Solutions Manual is a unique resource designed to enhance the learning process Cases and Readings Supplement The Cases and Readings Supplement, available in electronic form, challenges students to think about and use cost-management information in a real-world setting The longer articles provide a basis for more comprehensive and in-depth discussions about the role of cost management in helping an organization successfully execute its strategy We have found the Cases and Readings Supplement to be particularly useful for upper-level undergraduate courses and for graduate-level offerings Excel Tutorials The seventh edition provides the Microsoft Word version of a set of 20 Excel tutorials (one for each chapter) These tutorials are also available in a narrated, step-by-step video animation format The tutorials are tied to one of the main topics covered in the chapter Thus, students can simultaneously hone their Excel-based skills using either version of the tutorials, while working to reinforce major topics covered in the text A Framework to Integrate Strategy: The Five Steps of Strategic Decision Making The first edition of Cost Management introduced a five-step framework for decision making with a strategic emphasis The framework shows that each decision starts and ends with a consideration of the organization’s strategy To extend and integrate the strategic emphasis, the seventh edition continues the tradition of including this five-step framework throughout the text In all but a few chapters there is a short section that uses the five-step framework to show how a consideration of the organization’s strategy plays a key role in making the decision that will address the business-related problems presented in that chapter bLo33770_ch06_169-213.indd 180 29/05/15 3:41 PM The Globally Competitive Economic Environment Increases the Importance of Reviewing and Executing Strategy The current globally competitive economic environment requires today’s firms to place an even greater emphasis on the successful execution of their strategies Moreover, increased competitive pressures may require organizations to review and modify their strategies to compete more effectively in response to the globally competitive environment SAS Software SAS’s Activity-Based Costing (ABC) software is used worldwide for performance management functions and analysis Cost Management incorporates SAS software in its ABC case material to prepare students for calculating ABC costs, creating cost-driver assignments, and organizing cost information using real-world software Visit the Connect Library today to learn more about the software and the cases available for use Both the cases and the software are available free to adopters ix Glossary weighted-average contribution margin ratio An average contribution margin ratio for a given sales mix based on sales dollars (not units) weighted-average cost of capital (WACC) An average of the (after-tax) cost of debt and equity capital for a firm; in general, the WACC is the appropriate discount rate to use for future cash flows associated with “average risk” projects weighted-average method A method for calculating unit cost under process costing that includes all costs, both those incurred during the current period and those incurred in the prior period that are shown as the beginning work-in-process inventory of the current period what-if analysis The calculation of an amount given different levels of a factor that influences that amount work cells Small groups of related manufacturing processes organized in clusters to assemble parts of finished products Work-in-Process Inventory An inventory account that contains all costs put into the manufacture of products that are started but not complete at the financial statement date 877 working capital The difference, at any balance sheet date, between total current assets (CA) and total current liabilities (CL); contrast with net working capital (as used within the context of capital budgeting) Y yield-to-maturity A long-term bond yield (rate of return) expressed as an annual rate; the calculation takes into account the current market price of the bond, its par value, the coupon interest rate, and the time-to-maturity; a rate of return that indicates the total performance of a bond, coupon payments as well as capital gain or loss, from the time of purchase until maturity Z zero-base budgeting (ZBB) A budgeting process that requires managers to prepare budgets each period from a base of zero I N D E X Page numbers followed by n indicates notes A ABC See Activity-based costing (ABC) ABM See Activity-based management (ABM) Abnormal spoilage, 110, 111 Absolute quality conformance, 694–696 Absorption approach, 593n Accenture, 97, 752 Accountants See Management accountants Accounting See also Management accounting capital budgeting and, 439–442 lean, 13, 714–716 quality management and control and, 686–688 value stream, 321–322 Accounting (book) rate of return (ARR) evaluation of, 468–469 explanation of, 467–468, 472 Activities in activity-based costing, 132–134 activity-based management and analysis of, 139–140 batch-level, 133, 310–313 explanation of, 130 facility-level, 133, 310–311 high-value-added, 140 low-value-added, 140–141 product-level, 133, 310–311 unit-level, 133 volume-based CVP and, 310–312 Activity analysis, 12 Activity-based budgeting (ABB) explanation of, 362–364 time-driven, 364–365 Activity-based cost drivers, 70–71 Activity-based costing (ABC) activity-based management and, 138–142 assigning activity costs to cost objects for, 134 assigning resource costs to activities for, 133 benefits of, 134 cost of capacity calculations for, 138 cost of quality and, 704 customer profitability analysis and, 142–147 CVP analysis for, 310–313 example of, 135–137 explanation of, 12, 98, 128, 130, 217 GPK and RCA and, 615–616 identifying resource costs and activities for, 132–133 implementation issues and extensions for, 147–150 multinational corporations and, 809 multistage, 147–148 overhead cost variances and, 611–616 resource consumption accounting and, 148 setup costs in, 614–615 standard batch size for production activity and, 614–615 strategic decision making and, 137–138 strategic role of, 128–129 terms used in, 130 theory of constraints and, 189–190, 516 878 time-driven, 149–150 two-stage cost assignment and, 130–132 volume-based costing vs., 129, 134–137 Activity-based management (ABM) activity analysis and, 139–140 applications of, 141–142 explanation of, 12, 138, 139 value-added analysis and, 140–141 Activity consumption cost drivers, 130 Actual costing systems, 97, 101 Actual factory overhead, 101–102 Administrative support departments, 749–750 Advance pricing agreement (APA), 811 Aeppel, Timothy, 418n, 568n, 571n Airline industry baggage-handling issues in, 713 fares and fees in, 84 managing capacity in, 598 quality ratings and competitive benchmarking in, 706 weather and costs in, 75 Albright, T L., 696n, 698 Alcoa, 196 Allied Signal, 692 Allocated costs, 228–229 Allocation base, 226–228 Amato, Neil, 369n Amazon, 8, 307, 404, 705 American Institute of Certified Public Accountants (AICPA), 18, 31, 89 American Production and Inventory Control Society, 648 American Productivity & Quality Center (APQC), 14, 158, 648 American Society for Quality, 648 Amoia, Bonnie A., 240n Analytic hierarchy process (AHP), 440–441 Anderson, Steven R., 149n, 364n Antidumping laws, 414 Apparel manufacturers, 503, 515 Apple Computer, 48, 50, 807, 817 Appraisal costs, 700, 701 Appropriations, 341 Armental, Maria, 36n Arm’s length standard, 808 Arthur, David, 48n Asset recognition method, 237–239 Asset-replacement decision problems spreadsheet templates for conducting DCF analysis for, 473–474 structure for, 457–458 Assets average total, 801 current value of, 791–793 to include in ROI calculations, 790 real, 462 shared, 790–791 Asset turnover (AT), 787–789 Association of Chartered Certified Accountants (ACCA), 5, 20 Association of Chartered Fraud Examiners (ACFE), 32 Audi, 29 Authoritative budgeting, 366–367 Authoritative standards, 559 Automobile industry backup cameras and, 504 capacity utilization in, 597 cost of idle capacity in, 601 environmentally conscious purchases and, 405 excess production in, 609 flexible manufacturing in, 600 Great Recession and, 643 sourcing risk in Japan’s, 696 target costing in, 500, 502 Average cost method, 232 Average costs See Unit costs Average-risk projects, 450 Ayres, Ian, 151n, 267n B Backflush costing, 190–191 Bahree, Megha, 751n Baier, Neil H., 788n Bailey, Martin Neil, 645 Bajaj, Vikas, 751n Baker, H Kent, 801n Balagopal, Balu, 48n Balakrishnan, R., 106n, 616, 623n Balanced scorecard (BSC) benefits of, 42 business analysis and, 841–843 capital budgeting and, 440–441 for electronics firm, 44 evaluating strategic initiatives using, 760 explanation of, 10–11, 41–42 function of, 738–739, 746 global application of, 761 implementation of, 43, 44, 759, 760 management compensation and, 835 strategic performance measurement and, 758–760 strategy and, 43 strategy map and, 10–11 sustainability and, 47–49 timing, cause-and-effect and leading measures in, 43 Balance sheet, budgeted, 355–358 Baldrige National Quality Program, 59 Balik, R J., 473n Balsara, N., 461n Banchero, Stephanie, 300n Banham, Ross, 368n Banker, Rajiv D., 759n Barber, Felix, 817n Barcadi Limited, 605 Barmwell, Hason, 341n Barr, Colin, 836n Barriers to entry, 35 Barsky, Noah P., 63 Bartley, J., 605n Barton, Thomas L., 495 Bartov, Eli, 833n Index Bassie, Laurie, 821 Batch-level activities, 133, 310–313 Batch-level cost drivers, 397–398 Batch size, activity-based costing and, 614–615 Bates, D W., 442n Baun, William B., 821 Beck, Melinda, 557n Benchmarking, 12–13 Benefits, 831 Bennett, Jeff, 304n, 503n Bensinger, Greg, 404n Berfield, Susan, 49n Berra, Yogi, 35 Berry, Ian, 267n Berry, Leonard L., 821 Berry, S G., 451n Beta coefficient, 452 Betterton, C E., 451n Beyond Budgeting Roundtable (BBRT), 368, 369 Biery, Mary Ellen, 845n Bikes.com, 91 Bill of materials, 403 Binkley, Christina, 103n, 515n B Lab, 49 Black, T., 568n Blocher, Edward, 190n Bloomsberg Businessweek, 30, 31 BMW, 29 Boeing, 502, 800 Boer, German, 494 Bonus compensation pools, 836, 837 Bonuses compensation objectives and, 835 compensation pools and, 836, 837 explanation of, 831 nonperformance-related, 834 objectives for, 834–836 payment options for, 836–838 Book value gross, 792, 793 net, 791–793, 795 Boston Lyric Opera, 738 Boudette, Neal E., 142n, 597n, 751n Bowen, B D., 706n Brazil, economy in, 54 Breakeven planning cost-volume-profit analysis for, 303–306 CVP graph and profit-volume graphs and, 304, 306 in dollars, 303–304 explanation of, 303 short-cut formulas for, 304 in units, 303 Breakeven point explanation of, 303 illustration of, 305 margin of safety and, 315 retirement benefits and, 309 Brealey, R A., 451n, 457n Brewer, P C., 693n, 714n, 723n, 758n Brooke Group Ltd vs Brown & Williamson Tobacco Corp., 414 Buckless, F., 605n Buckly, Chris, 556n Budge slack, 365–366, 747–748 Budget committees, 343, 344 Budgeted balance sheet, 355–358 Budgeted capacity utilization, 598 Budgeted income statement, 354–355 Budgeting See also Capital budgeting activity-based, 362–365 behavioral issues in, 365–369 explanation of, 340, 341 kaizen, 365 in service industries, 360–362 strategy in, 342–343 time-driven activity-based, 364–365 zero-base, 362 Budgeting process authoritative vs participative, 366–367 budgetary slack and, 365–366 budget committee and, 343, 344 budget guidelines and, 344 budget period and, 343–344 difficulty level of budget target and, 367 elements of, 343 example of, 344–345 goal congruence and, 366 linkage of compensation and budgeted performance and, 367–369 negotiation, review, and approval and, 344 revision and, 344 uncertainty and, 356–360 Budgets authorization function of, 341 cash, 354 cash receipts, 353 cost of goods manufactured and cost of goods sold, 351–352 direct labor, 350 direct materials purchase, 349–350 direct materials usage, 348–349 explanation of, 340, 341 factory overhead, 350, 351 financial, 343 flexible, 544–558, 605, 611–614, 644–645, 651 manufacturing, 346–352 master, 342, 345–356 (See also Master budgets) merchandise purchases, 352 operating, 342–343 padding, 365–366 production, 346–348 sales, 345, 346 selling and administrative expense, 352–353 static, 544 Budget target, 367 Buhovac, Adriana Rejc, 47n, 782 Bullet-dodging, 849 Burberry Group PLC, 515 Burke, Cary, 24n Burnett, Royce D., 690n Burritt, Chris, 646n Bushman, R., 833n Business analysis balanced scorecard and, 841–843 explanation of, 841 financial ratio analysis and, 843–844 Business analytics, 12, 267 Business environment cost management practices and contemporary, 7–9 879 global, 7, Business intelligence (BI), 12 Business process improvement (BPI), 13 Business valuation discounted cash flow method for, 845–847 enterprise value and, 847 explanation of, 844–845 multiples-based, 847 price-earnings ratio and, 846 strategic decision making and, 848 Bussey, John, 751n Bustillo, M., 347n Butler, Janet, 64 By-product costing asset recognition method for, 237–239 explanation of, 237–238 revenue methods for, 237, 239–240 By-products, 232 Byrne, David, 66n, 215n C CAFTA See Central America Free Trade Agreement (CAFTA) Campbell, R J., 516n Campbell Soup, 646 Capacity calculating cost of, 138 demand-based definitions of, 598–600 idle, 601, 608 management of, 598 normal, 598 practical, 365, 598, 599 supply-based definitions of, 598 theoretical, 598 usage of, 74–75, 652 Capacity utilization in auto manufacturing, 597 budgeted, 598 productivity and, 652, 671 Capell, Kerry, 515n Capital-asset pricing model (CAPM), 452 Capital budget, 440 Capital budgeting accounting role in, 439–442 balanced scorecard and, 440–441 cost escalation and, 469 discounted cash flow models and, 449 explanation of, 342, 439 goal-congruency issues and, 469–471 incrementalism and, 469 master budget and, 440 non-discounted cash flow models for, 449 payback period and, 465–469 post-audits and, 441 real options and, 461–465 relevant financial data for decision making and, 441 sensitivity analysis and, 458–461 strategic decision-making steps and, 442 uncertainty and, 458–465, 469 Capital constraint, 476 Capital-expenditure analysis identification of relevant cash flow data for, 442–449 in public and not-for-profit sectors, 441 880 Index Capital expenditures, 439 Capital investments capital budgeting and, 439–442, 465–471 (See also Capital budgeting) capital-expenditure analysis and, 442–449 (See also Capital-expenditure analysis) decision models for, 472 discounted cash flow models and, 449–458 (See also Discounted cash flow (DCF) models) explanation of, 439 uncertainty and, 458–465, 469 Capital One, 145 Capital rationing, 476 Capital structure, 451 Cardwell, Diane, 49n Carey, S., 598n Carlton, Jim, 566n Car-share programs, 305 Cash budget, 354 Cash flows See also Discounted cash flow (DCF) models capital-expenditure analysis and, 442–444 determining after-tax, 444–449 Cash receipts (collections) budget, 353 Caspedes, Frank, 521n Catanach, Anthony H., Jr., 63 Caterpillar Inc., 693 Cause-and-effect diagrams, 710–713 Central America Free Trade Agreement (CAFTA), Certification for management accountants, 20–21, 31, 464 sustainability, 49 Certified Management Accountants (CMAs), 20 certification for, 20–21, 31, 464 function of, Certified Public Accountant (CPA), 20–21, 31 Chakravorty, S S., 691 Chang, Hsihui, 759n Chao, Loretta, 524n Chartered Global Management Accountant (CGMA), 21 Chartered Institute of Management Accountants (CIMA), 20 Chasan, Emily, 36n, 304n Chasen, E., 800n Chen, Al, 605n Chen, G., 276n Chen, Su-Jane, 473n Cheniere Energy, Inc., 837 Chernova, Yuliya, 397n Chief executive officers (CEOs), 839 Chief financial officers (CFOs), Chili’s Restaurants, 646 Chouinard, Yvon, 49n Chow, Chee W., 44n Chozick, A., 696n Christensen, Clayton M., 494–495 Chrysler, 643 Churchill, W., 442n Churchill, Winston, 18 Clark, V., 461n Clary, D., 692 Clear Channel Communications, Inc (CCC), 299 Climate change, supply chains and, 560 Clinton, B Douglas, 615n Clorox, 800 Coca-Cola Company, 97, 169, 170, 669, 800, 839 Coefficient of determination, 264 Cokins, Gary, 505n Colbert, Gary J., 803n Cole, Jeff, 691n Collis, David J., 15n Commodities, 17 Common stock, cost of, 452 Comparable-price method, 808 Compensation budget performance and incentive, 367–369, 470–471 incentive, 800 linear, 368 management, 830–840, 861 Competency Crisis (Institute of Management Accountants), 341 Competition in new economy, 34 time-based, 705 Competitive strategy cost leadership and, 15–16 decision making and, 17–18 development of, 16–17 differentiation and, 16 execution of, 37–38 CompuCity, 792–793, 796 CompUSA, 386–387 Computer manufacturing strategic decision making in, 40–41 value-chain analysis in, 39–41 Concurrent engineering, 505 Confidence interval, 265–266 Conformance absolute quality, 694–695 costs of, 702 goalpost, 694 goalpost vs absolute, 695–696 Consortium for Advanced Management, 158 Constant gross margin percentage method, 236–237 Constraints explanation of, 510 Takt time and, 513–514 theory of, 13, 189–190, 509–517 use of flow diagram to identify, 522–523, 537 Construction costs, regression analysis to estimate, 268, 276 Consumer Financial Protection Bureau (CFPB), 19 Continuous-improvement budgeting, 365 Continuous-improvement standards, 558–559 Contribution by profit center (CPC), 754, 755 Contribution income statement explanation of, 302, 754–755 international accounting standards and, 757–758 value streams and, 758 variable costing vs full costing and, 755–757 Contribution margin per unit, 301 total, 301 weighted-average, 319–321 Contribution margin ratio explanation of, 301, 304 weighted-average, 319–320 Control See also Management control ABC-based flexible budgets for, 611–614 explanation of, 542 financial, 542–544 management, 4, 5, 739–741 operational, 4, 5, 542, 739 Control charts function of, 617–618, 708–709 statistical, 618 Controllable fixed costs, 755 Controllable margin, 755 Conversion costs explanation of, 70 in process costing, 170–171 Cooper, R., 612 Cooper, Robin, 221n, 365n, 504, 505n, 516n, 714n, 715 Core competencies, 35 Corkins, Gary, 141n Corporate Automotive Fuel Efficiency (CAFE) standards, 88–89 Corporate social responsibility (CSR), 687 Correlation, 265 Correlation coefficient, 265n Cost allocation by-products and, 237–240 cost centers and, 750–751 departmental approach to, 216–220 direct and indirect costs and, 68–69 direct method of, 220–221 dual, 227–228 ethical issues of, 216 explanation of, 68 in health care, 240 implementation issues in, 224, 226–229 joint product costing and, 232–237 net realizable value method for, 234–236 physical measure method for, 232–233 reciprocal method for, 223–225 in service industries, 229–231 step method for, 222–223 strategic role of, 215–216 use of, 217n Cost assignment, 67–68 Cost-benefit analysis, 442 Cost centers for administrative support departments, 749–750 cost allocation and, 750–751 explanation of, 745–746 not-for-profit organizations and, 761 outsourcing or consolidating, 750 for production and support departments, 748–749 in retail firms, 747 strategic issues related to, 747–748 Cost drivers activity-based, 70–71 batch-level, 397–398 cost behavior and, 70 cost estimation to identify, 257 executional, 76–77 explanation of, 67, 130 for factory overhead application, 102–103 function of, 70 method to determine, 258 Index structural, 75–76 volume-based, 71–75 Cost escalation, 469 Cost estimation explanation of, 256 high-low method for, 259–262 to identify cost drivers, 257 illustration of, 259 nonlinearity and, 270–271 to predict future costs, 257 regression analysis for, 262–270 steps in, 258–259 strategic role of, 256–257 time-series regression and, 270 Cost flows job costing and, 98–102 in manufacturing, retail and service firms, 77–80 Cost indifference point, 305 Costing activity-based, 128–150 (See also Activitybased costing (ABC)) backflush, 190–191 by-product, 237–240 explanation of, 96–97 job, 96–111 (See also Job costing) joint product, 232–237 life-cycle, 12, 501, 517–518 multistage activity-based, 147, 148 normal, 98 operation, 108–109 process, 97 (See also Process costing) strategic role of, 98 target, 12, 500–509 variable vs full, 755–757 Cost leaders, ranking of, 30, 31 Cost leadership, 15–16 Cost life cycle explanation of, 12, 501 life-cycle costing and, 517 pricing using, 519–520 Cost management approach to, 2–3 explanation of, functions of, 4–5, 15, 70 professional certifications for, 20–21, 31 professional ethics and, 21–22 professional organizations and, 18–20 role in management accounting, 3–4 strategic emphasis in, 5–6, 10, 66 Cost management information accuracy of, 80 cost and value of, 80 explanation of, management functions and, 4, 256 organization types and, 6–7 timeliness of, 80 Cost management systems, 10 Cost objects, 67 Cost of goods manufactured, 80 Cost of goods manufactured budget, 351–352 Cost of goods sold (CGS) adjustment to, 105 explanation of, 77 variance and, 599n, 608–610 Cost of goods sold budget, 351–352 Cost of quality (COQ) activity-based costing and, 704 appraisal costs and, 700, 701 conformance and nonconformance costs and, 702 explanation of, 691, 700 external failure costs and, 700, 702, 703 internal failure costs and, 701–702 prevention costs and, 700, 701 Cost-of-quality (COQ) reports format for, 702–703 function of, 700, 702 illustration of, 703–704 Cost planning fixed and variable costs and, 306–308 life-cycle costing and, 12, 501, 517–518 overview of, 500–502 own vs rent decision and, 305 product life cycle and, 518–522 sales commissions and salaries and, 308–309 target costing and, 502–509 theory of constraints and, 509–517 Cost-plus method, 809 Cost pools, 67 Costs accumulation of, 97 appraisal costs, 700, 701 capacity vs usage of, 74–75 conformance, 702 conversion, 70 direct, 67–69 direct labor, 563–564 direct materials, 562–563 explanation of, 67 external failure, 700, 702, 703 fixed, 72–74, 306–308, 395–396 historical, 791 indirect, 67–70 internal failure, 701–702 labor, 69, 100–101 materials, 99–100 measurement of, 97 mixed, 73 nonconformance, 702 opportunity, 398–399, 808 order-filling, 752 order-getting, 752 period, 77 prevention, 700, 701 pricing based on, 519–520 prime, 60 product, 77 relevant, 395–397 standard, 549, 558–564, 651 (See also Standard costs) step, 73–74 total manufacturing, 80 transferred-in, 171, 184 unit, 74 variable, 72–74, 304, 306–308, 395–396 Cost shifting, 244, 747 Cost tables, 505 Cost tracing, 217n Cost variances, overhead, 611–616 Cost-volume-profit (CVP) analysis for activity-based costing, 310–313 assumptions and limitations of, 322–323 for breakeven planning, 303–306 contribution margin and contribution income statement and, 301–302 881 explanation of, 299–301 income taxes and, 310 for not-for-profit organizations, 322 for profit planning, 306–310 risk and uncertainty and, 313–318 strategic decision making for, 318–319 strategic role of, 320 with two or more products/services, 319–322 Cox, J., 510n Coy, Peter, 646n, 751n Coyne, E J., Jr., 634 Coyne, K P., 634 Coyne, S T., 634 Crate & Barrel, 307 Create-A-Mattress.com, 18 Crescent Crown Distgributing (CCD), 788 Critical success factors (CSFs) bonuses and, 833, 834 business analysis and, 841, 842 explanation of, 10 management compensation and, 833 SWOT analysis and, 35–37 Cross, Lisa, 112 Cross-sectional regression, 270 Cruitt, Joseph J., 234n Crystal Ball (Oracle), 461 CSFs See Critical success factors (CSFs) Cultural environment, Currently attainable standards, 559 Current value, of assets, 791–793 Curtin, Margaret, 494 Customer batch-level cost, 144 Customer cost analysis, 143–145 Customer-focused strategy, 16 Customer lifetime value (CLV), 145–147 Customer loyalty, 143, 706 Customer metrics, 146 Customer profitability analysis customer cost analysis and, 143–145 customer lifetime value and, 145–147 explanation of, 142–143 Customer-response time (CRT), 568, 706–707 Customers bargaining power of, 36 trends in focus on, 8–9 Customer satisfaction explanation of, 11 quality and, 690 Customer service, 30–31 Customer-solution strategy, 16 Customer sustaining cost, 144 Customer unit-level cost, 143 Customs charges, 811 CVP analysis See Cost-volume-profit (CVP) analysis CVP graph, 304–306 CVP model, 300, 301 See also Cost-volumeprofit (CVP) analysis Cycle time, 509, 510 D Daniels, M., 450n Darwin, Charles, 20 Database software, 98–99 Data mining, 280 Davenport, Thomas H., 151n, 522n 882 Index Davila, Antonio, 833n Dawson, C., 568n DCF See Discounted cash flow (DCF) models Dean, Jason, 524n Death-spiral effect, 601 Decentralization, 745, 784 Decision making See also Strategic decision making competitive strategy and, 17–18 in computer manufacturing, 40–41 in CVP analysis, 318–319 investment, 465–466 relevant cost analysis and, 699–700 steps in, 17–18, 394–395, 442 Decision tables, 314 Decision trees, 314, 463 Degree of operating leverage (DOL), 318 Deming, W Edwards, 142n, 738 Denison, Christine A., 461n Denominator activity level (denominator volume), 598 Deo, Prakash, 801n Departmental approach, 216 Departmental overhead rates, 104 Dependent variable, 262–264 Depreciation MACRS, 493–494 relevant cost analysis and, 398 Desheh, Eyal, 803n Design, life-cycle costing and, 517–518 Design analysis, 504, 505 Design quality, 688 de Treville, Susan, 463n Devin, Leonard, 267n Dhiensiri, N., 461n DHL, 519 Diapers.com, 307 Differential cost analysis, 397 Differentiation, 16, 18 Differentiation strategy, example of, 169 Direct costs departmental allocation approach and, 218–219 explanation of, 67 indirect vs., 68, 69 of labor, 69 of materials, 69 Direct labor budget, 350 Direct labor costs establishing standard cost for, 560–561 explanation of, 563–564 job costing and, 100–101 Direct labor efficiency variance (EV), 555–557 Direct labor rate variance (RV), 555 Direct labor variance, 554–557 Direct materials establishing standard cost for, 560 job costing and, 99–100 process costing and, 171 Direct materials cost, 562–563 Direct materials price variance (PV), 553–554 Direct materials purchase budget, 349–350 Direct materials usage budget, 348–349 Direct materials usage variance (UV), 554 Direct materials variance, 551–554 Direct method, of departmental cost allocation, 220–221 Discounted cash flow (DCF) models asset-replacement decision problem and, 457–458 business valuation and, 845–847 capital rationing and, 476 discount rate and, 450, 451 explanation of, 449, 794 internal rate of return, 456, 457 modified internal rate of return and, 456 multiple IRRs and, 475 mutually exclusive projects and, 475–476 net present value and, 453–457 spreadsheet templates for conducting, 473–474 types of, 449–450 weighted-average cost of capital and, 451–453 Discount rate, 450, 451 Discretionary-cost method, 748, 749 Disincentive effects allocated costs and, 228–229 allocation base and, 226–228 Distribution-channel cost, 144 Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), 14, 19 Domino’s Pizza, 760n Donovan, Christopher, 149n Dosch, Jennifer, 192n Dowell, A., 689n Dow Jones Sustainability Index, 14, 47 D’souza, Anil G., 687n Dual allocation, 227–228, 750 Duke Children’s Hospital (DCH), 738–739 Duke Energy, 787 DuPont approach, 267 E Eaglesham, Jean, 22n eBay, 8, 705 Economic profit, 816–817 Economic value added (EVA) alternative approaches to estimating, 800–801 average total assets and, 801 estimation of, 799–801 explanation of, 470, 798–799, 844 shareholder value and, 824 Economy Great Recession of 2008 and, 643, 644 new, 8, 34, 793 productivity change and, 670–671 volatility in, 368 eHarmony, 267 Eighme, J E., 693n, 723n Einstein Noah Restaurant Group, 787 Eldenburg, Leslie, 221n Electrolux, 519, 705 Ellsworth, Richard K., 276n Emett, Scott, 760n Employees layoffs of, 694 management compensation and, 830–840 wellness programs for, 821 Employment contracts explanation of, 741 lack of observability and, 741–743 risk aversion and, 741 uncertainty and, 741, 742 Engineered-cost method, 748, 749 Ennis Inc., 118 Enron Corporation, 22, 32, 833 Enterprise resource management, trends in, Enterprise resource planning systems (ERPs), 759 Enterprise risk management (ERM), 14, 29 Enterprise value (EV), 847 Environmental performance, 690 Epstein, Marc J., 47n, 196, 518n, 782 Equipment-replacement decisions, 397, 398, 488, 493 Equivalent units calculation of, 175–176, 178–181, 185–187 explanation of, 170–171 Esterl, Mike, 75n Ethical issues in cost allocation, 216 in management compensation, 832–833 in overhead variance, 632 Ethical standards, for management accountants, 21–22 Ethisphere Institute, 32 Euro, 36 “European Union Circular Economy Programme” (European Union), 196 European Union (EU), 7, 196 EVA See Economic value added (EVA) Evans, J R., 692, 693n, 695n, 703n Evans, K., 319n The Evolution of Accountability—Sustainability Reports (Institute of Management Accountants), 690 Ewer, S R., 608n Excel (Microsoft), 225, 226, 268–269, 314–315, 356, 357n, 416–417, 456, 495, 497–499 Executional cost drivers, 76–77 Expected value analysis, 314 Expected value of perfect information (EVPI), 622 Expropriation, 811 External failure costs, 700, 702, 703 F Facility-level activities, 133, 310–311 Factory overhead explanation of, 70 job costing and, 101–102 Factory overhead applied, 102–103 Factory overhead budget, 350, 351 Faith, Joanna, 216n FASB ASC 330-10-30, 598 Fastow, Andrew, 833 Featherstone, E., 442n Federal Accounting Standards Advisory Board (FASAB), 19, 142 Federal Reserve Board, 29 Federal Trade Commission (FTC), 19 Federated Department Stores, Inc., 693 FedEx, 97 Feedback loops, 691 Feld, Anthony, 646n Ferreira, Nelson, 463n FIFO See First-in, first-out (FIFO) method Index Financial Accounting Standards Board (FASB), 19, 215, 757, 854 Financial budgets, 343 Financial control explanation of, 542 short-term, 543–544 Financial Executive International (FEI), Financial fraud, 22, 32 Financial performance explanation of, 11 of investment centers, 784–786 return on investment and evaluation of, 787–788, 797 Financial-performance indicators for investment centers, 786 short-term, 564–566 Financial productivity explanation of, 645 partial, 648–650 Financial ratio analysis, 843–844 Financial reporting function of, 3–4 international standards for, 757–758 management compensation and, 838–839 Financial statements, 4, Finished Goods Inventory, 79 Firmwide pools, 836, 837 First-in, first-out (FIFO) method explanation of, 173 in process costing, 177–182, 186–189 weighted-average method vs., 182–183 FitzGerald, Drew, 834n Fixed costs controllable, 755 cost planning and, 306–308 explanation of, 72–73, 304 management of, 304 noncontrollable, 755 relevant, 395–396 unit, 74 variable costs replaced by, 414 Fixed overhead, allocation of, 609–610 Fixed overhead application rate, 598 Fixed overhead cost analysis background of, 596 demand-based definitions of capacity and, 598–600 fixed overhead spending variance and, 600 graphical representation and, 627–628 interpretation of, 600–602 production volume variance and, 596–598 supply-based definitions of capacity and, 598 Fixed overhead production volume variance, 599–600, 609 Fixed overhead spending (budget) variance, 600–602 Fixed-performance contract, 367, 368 Fixed-spending variance, 615 Flandez, Raymond, 143n Flexcell International Corporation, 463 Flexible budgets activity-based costing-based, 611–614 explanation of, 544–545 master budgets and, 544, 545 partial productivity, standard costs and, 651 productivity and sales and, 644–645 steps in, 545–546 sustainability and, 605 Flexible-budget variance direct labor, 554–557 direct material, 551, 553–554 explanation of, 548–549 sales volume variance and, 547–548 selling price, 548–549 timing of recognition and, 557–558 total, 548, 604 total variable cost, 550 variable cost, 548, 550–552 Flexible manufacturing, in automobile industry, 600 Flow diagrams, 511 Ford, Henry, 13, 502 Ford Motor Company, 14, 47, 48, 214, 502, 503, 689, 693 Foreign currency restrictions, 811 Foreign current translation, 806 Four-variance analysis of factory overhead, 602 Fowler, Geoffrey, 307n Fragkakis, N., 276n Franklin, Benjamin, 128, 509 Franz, C., 442n Fraser, Robin, 368n Fraud, 22, 32 French Accounting Association, 20 Friedman, Thomas, 17, 406, 751n Frigo, Mark L., 865 Full cost and desired gross margin percent approach, 520 Full cost approach explanation of, 593n for transfer pricing, 803, 804 Full costing, 593n, 755–757 Full cost plus desired return on assets approach, 520 Full manufacturing cost plus markup method, 519 Functional analysis, 504, 505 G GAAP See Generally accepted accounting principles (GAAP) Galli, Joseph, 832n Gaming the performance measure, 368 Gandhi, T K., 442n Gap, Inc., 307 Garcia, A., 601n, 623n, 634n GBV See Gross book value (GBV) General Electric (GE), 48, 214, 519, 669, 692 Generally accepted accounting principles (GAAP), 138n, 596, 757–758, 854 General Motors (GM), 32–33, 48, 304, 643–644 Gilbert, Daniel, 837n Gillespie, Jackson F., 274n Gilt Groupe Inc., 307 Glader, P., 402n Glazer, E., 359n Glazer, Emily, 405n Glick, Noah, 240n Global business environment cost management practices and, 7, exchange rates and, 36 transfer pricing and, 808–811 Goal congruence budgeting process and, 366 883 capital budgeting and, 469–471 Goalpost conformance absolute conformance versus, 695–696 explanation of, 694 Goebel, J., 300n, 318n Goldratt, E., 510n Gompertz equation, 283 Google, 8, 14, 48, 817 Government, real-world activity-based costing management applications in, 141–142 Governmental organizations budgets for, 341 cost management information and, GPK, 148, 615–616 Graham, J., 450n Grahame, Steven, 273n Great Recession of 2008, 643, 644 Green, Jeff, 834n Grenzplankostenrechung (GPK) See GPK Grichnik, Kaj, 142n, 715n Gross book value (GBV), 792, 793 Gross domestic product (GDP), 64 Group technology, 505 Gryta, T., 451n Gupta, Sumil, 146n H Haanaes, Knut, 48n Haddad, Kamal M., 44n Hagerty, J R., 402n, 643n, 646n, 763n Hall, Brian J., 849n Hammert’s Iron Works, 96 Haney, Michiko Hamada, 809n Hansen, D R., 690n Hansen, Stephen, 106n Harbour Report, 670 Harley-Davidson, 61–62, 669 Harrah’s Casinos, 145, 270 Harris, Elizabeth, 18n Harris, Jeanne G., 151n, 522n Harvey, C., 450n Harvey, S K., 605n Hatch, T., 761n Hayes, Michael, 839n Headly, D E., 706n Health care quality, 686 Health product manufacturing target costing in, 506–507 theory of constraints in, 510–512 Healy, Paul M., 841n, 845n Helyar, John, 751n Henderson, Sandra Cherie, 64 Hesser, Kirk, 809n Hewlett-Packard, 519, 832 High-low method, 259–262, 295–297 High-value-added activities, 140, 141 Hill, K., 712n Hillshire Brands, 14, 15 Histograms, 709–710 Historical cost, 791 Hoffelder, Kathleen, 368n Holliday, Charles O., 47 Holzer, Jessica, 22n, 831n Home Depot, 47, 48, 693, 832 Honda, Soichiro, 758 Honda Motor Company, 14, 502, 600 884 Index Hook, J., 807n Hope, Jeremy, 368n Hopkins, Michael S., 48n Hopkins, Mike, 149n Howell, Robert A., 5n Hoyt, Louis, 494 Human capital return on investment (HC ROI), 797 Hurd, Mark, 832 Hurdle rate, 450 Hyatt, Josh, 522n, 694n I IBM Corporation, 47, 48, 214, 752 Ideal standards, 558 Idle capacity, 601, 608 Ihwan, Moon, 813n Implementation errors, 617 Income, residual, 796–799 Income statement budgeted, 354–355 contribution, 302, 754–758 value streams and, 715, 716 Income taxes in CVP analysis, 310 international transfer pricing and, 809–810 Incrementalism, capital budgeting and, 469 Independent variable, 262, 264 Indifference probability, 621–622 Indirect costs departmental allocation approach and, 218–219 direct vs., 68, 69 explanation of, 67–68 fixed, 73 of labor, 69, 100–101 of materials, 69, 99–100 types of, 70 Indjejikian, R., 833n Information technology, 8, 752 Innovation, 817–818 Institute of Internal Auditors (IIA), 20 Institute of Management Accountants (IMA) certification administered by, 20, 31 Competency Crisis website, 341 The Evolution of Accountability— Sustainability Reports, 690 function of, 18–20 Statement of Ethical Professional Practice, 21–22, 383, 577, 634 Statement on Management Accounting, survey by, Institutes of Chartered Accountants, 20 Intel, Inc., 502 Intermountain Healthcare, 557 Internal accounting controls, 80 Internal failure costs, 700–702 Internal rate of return (IRR) estimation of, 455–456 explanation of, 454 modified, 456, 472 net present value method vs., 457 Internal rate of return (IRR) decision model, 454–456, 472 Internal Revenue Service (IRS), 19, 215, 809, 811 International accounting standards, 757–758 International Accounting Standards Board (IASB), 757, 854 International (CAM-I), 158 International Federation of Accountants, 464 International financial reporting standards (IFRS), 757–758, 854 International Organization for Standardization (ISO), 685 International Paper Company, 97, 170 Internet, economic information on, 29 Internet-based firms, growth in, Inventory, 79, 623 Inventory systems, 81 Investment centers economic value added and, 798–801 evaluating financial performance of, 784–786 explanation of, 746 function of, 784 residual income and, 796–798 return on investment and, 786–795 Investments See also Capital budgeting; Capital investments; Return on investment (ROI) analysis of, 464–465 disincentives for new, 794–795 examples of strategic, 438–439 exchange rates and, 36 payback period of, 465–467 IRR See Internal rate of return (IRR) Ishikawa, Karou, 710 ISO 9000 standards, 685 ISO 14000 standards, 685 Ittner, C., 833n Ittner, Christopher D., 760n J Jakab, Spencer, 845n James, Brent C., 557 Jargon, J., 359n Jargon, Julie, 514n, 646n J.D Power & Associates, 30, 670 Jenkins, David S., 845n Jensen, Michael C., 368n, 391n, 470n, 839n Jiffy Lube International, 97 Jiminy Peak Mountain Resort, 495 Job costing cost flows and, 98–102 cost measurement in, 97 explanation of, 98–99 factory overhead and, 102–106 flow of costs in, 98–102 operating costing and, 108–109 in printing company, 104, 112 rework and, 111 scrap and, 111 in service industries, 106–107 spoilage and, 110–111 use of, 96, 97 Job cost sheet, 98, 99 Johnson, Sarah, 763n Johnson & Johnson, 214, 340, 689 Johnstone, David, 475n Joint product costing constant gross margin percentage method for, 236–237 explanation of, 232 net realizable value method for, 234–236 physical measure method for, 232–233 sales value at split-off method for, 233–234 Joint production costs, 406 Joint production process, 232, 406 Joint products, 232 Jonas, Gregory A., 687n Jones, Ambrose III, 687n Jones, Del, 832n Joshi, Pradnya, 839n Juras, Paul E., 274n Just-in-time (JIT) manufacturing backflush costing and, 190–191 benefits of, 567–568 cost to implement, 567 explanation of, 567 kanban and, 696 quality-related decisions and, 699, 700 supply-chain risk and, 568 K Kahn, Gabriel, 524n Kahneman, D., 415n Kaizen, 506 Kaizen budgeting, 365 Kallapur, Sanjay, 221n Kanban systems, 696 Kane, Gregory, 845n Kane, Yukari Iwatani, 524n Kang, Benjamin, 5n Kang, Stephanie, 142n Kaplan, Robert S., 10, 44, 54, 149n, 364n, 440, 738n, 739, 803n Kar, Jayanti, 463n Karagiannidis, I., 451n Katz, D M., 568n Kaufman, Stephen P., 494–495 Kee, Robert, 313n, 516n Keeling, David J., 687n Kelleher, J C., 456n Kennedy, Frances A., 714n, 758n Keyes, David E., 615n Kimmel, Benjamin, 149n Kirk, James T., 741 Kiva Systems Inc., 307 Kmart, 16 Knox, Thomas A., 849n Koberna, Stephanie, 149n Kolet, Ilan, 666n Kong, Ming Teck, 48n Kowalski, Alexander, 666n Kozlowski, Dennis, 833 Kramer, Theresa R., 221n Krantz, Matt, 832n Krispy Kreme, 845 Krumwiede, Kip, 148, 615n Kruschwitz, Nino, 48n K&S Machine Shop, 653 Kucera, D., 705n Kumar, V., 143n, 167n Kupers, R., 460n Kurey, B., 685n L Labor costs direct and indirect, 69, 100–101 in retail sector, 556 variances in, 554–557 Index Labro, Eva, 106n Lahart, Justin, 666n Lambropoulos, S., 276n Langley, M., 689n Larcker, D., 760n, 833n Law of diminishing marginal productivity, 71 Lawson, R., 761n Lay, Kenneth, 833 Lean accounting explanation of, 13 strategic role of, 715–716 value streams and, 714, 715 Lean management, 712 Lean manufacturing accounting for, 13, 714–716 explanation of, 8, 713 principles of, 713–714 Learning curve analysis applications of, 273, 283 decisions and, 274 explanation of, 272–273 general form of learning model and, 274–275 limitations of, 275 nonlinear regression and, 277–278 in software development, 273–274 Learning rate, 272, 274–275 Lease vs purchase decisions, 403–406 Least squares regression, 262 Lee, Hau L., 538 Leiber, Nick, 751n Leondis, Alexis, 839n Leone, Marie, 267n Leone, R P., 167n Lessin, J E., 807n Liberatore, M J., 441n Lidgerding, Gary A., 839n Life-cycle costing cost life cycle and, 517, 520 design and, 517–518 explanation of, 12 industry use of, 517 Light, John, 763n Lincoln, Abraham, 18 Lindsay, W M., 692n, 693, 695n, 703n Linear compensation plans, 368 Linearity, CVP analysis and, 322–323 Linear programming, 416–418 Linebaugh, K., 600n, 601n, 807n Lipman, Victor, 560n Liquidation value, 792, 793 Liquidity, 843 Litman, Joel, 865 Liu, S., 461n Lockheed Martin Corp, 693 Loftus, P., 689n Long-range plans, 342 Lovallo, Dan P., 415n Lowenstein, Roger, 839n Low-value-added activities, 140–141 Loyalty, customer, 143 Lululemon Athletica, Inc., 689 M MacArthur, John B., 495 MacCormack, J J., 456n Mackie, Brian, 615n Mahanram, Partha, 833n Make, lease, or buy decisions relevant cost analysis and, 403–406 strategic analysis and, 406 trends in, 407, 418 Malcolm Baldrige National Quality Program, 59, 684–685 Management See also Cost management activity-based, 12, 138–142 functions of, 4–5 lean, 712 value-based, 799 Management accountants certifications for, 20–21, 31, 464 ethical standards for, 21–22 function of, organizations for, 18–20 Management accounting contemporary business environment and, 10–14 cost management and, 3–7 explanation of, Management accounting and control systems, 542–543 Management compensation bonus plans and, 834–838 design of, 831–832 ethical issues related to, 832–833 objectives of, 833–834 regression analysis using data on, 861–862 risk aversion and, 832 in service firms, 839–840 tax planning and financial reporting and, 838–839 types of, 831 Management compensation plans, 831 Management control explanation of, 5, 739 function of, 4, 743 in not-for-profit organizations, 761–762 objectives of, 740–741 Management control systems, 743–744 Manufacturing budgets, 346–352 Manufacturing cycle efficiency (MCE), 509–510 Manufacturing firms activity-based costing in, 129 cost flows in, 77–80 cost management information and, lean, 8, 713–716 overhead costs in, 593–605 Manzoni, J., 367n Marcus, A J., 451n Margin of safety (MOS), 315 Margin of safety (MOS) ratio, 315 Market capitalization, 845 Market-price method for transfer pricing, 803, 804 Market risk premium, 452 Market size, 658 Market size variance, 658–659 Marriott, 47, 48, 214 Marte, J., 451n Martinez, V., 449n Maskell, Brian H., 715n Master budgets See also Budgets budgeted balance sheet and, 355–358 budgeted income statement and, 354–355 capital-budgeting process and, 440 cash budget and, 354 cash receipts budget and, 353 explanation of, 342, 544 flexible budgets and, 544, 545 manufacturing budgets and, 346–352 merchandise purchases budget and, 352 sales analysis and, 653–662 sales budget and, 345–346 sales forecasts and, 345–347 selling and administrative expense budget and, 352–353 short-term objectives and, 342–343 strategy and, 342 Master budget variance, 543 Match.com, 267 Materials costs, direct and indirect, 99–100 Materials Inventory, 79 Materials purchase-price variance, 550, 553n Materials requisition, 100 Materials usage ratio, 554 Mathews, A W., 686n Matlack, C., 519n, 705n Mattioli, Dana, 5n Maviglia, S M., 442n Mayes, Timothy R., 473n MBA programs, 794 McCann, David, 839n McCartney, S., 706n, 713n McCartney, Scott, 522n McCue, Michael J., 240n McDonald’s, 14, 62, 833 McIntyre, Edward V., 274n McKittrick, Christopher T., 190n McMurrer, Daniel, 821 McWilliams, Gary, 142n Measurement errors, 617 Media advertising campaigns, 551 Medical-product companies, 687–688 Medicare, 223, 240 MemorialCare Health System, 686 Mercedes, 29 Merchandise purchase budget, 352 Merchandising firms, 77–80 See also Retail firms Merchant, K A., 366, 367n Merchant, Kenneth, 772, 773 Merck, 14 Merlino, J I., 685n Metz, P A., 276n Microsoft, 817 Microsoft Excel See Excel (Microsoft) Miller, John, 518n Milliken & Co., 169 Mintzberg, Henry, 37 Mirabito, Ann M., 821 Mission statements, function of, 14 Mitchell, J., 405n Mitchell, T., 551n Mixed costs, 73 Modeling errors, 617 Modified accelerated cost recovery system (MACRS), 493–494 Modified internal rate of return (MIRR), 456, 472 Moeller, Philip, 309n Molière, 830 Monahan, T F., 440n, 441n 885 886 Index Monga, V., 451n Monsanto, 267 Monte Carlo simulation capital budgeting and, 460–461 explanation of, 314–315, 461 Montgomery, Cynthia A., 15n Montie, Kerry, 149n Moore, Jonathan, 813n Moore, K., 712n Motorola, Inc., 692 Muise, Marianne L., 240n Mukherjee, Tarun, 801n Multicollinearity, 265 Multicriteria decision model, 440 Multinational corporations (MNCs), 808, 809 Multiple-based valuation, 847 Multiple departments FIFO method for, 186–189 transferred-in costs and, 184 weighted-average method for, 184–186 Multiple regression, 262 Multiproduct profit planning sales batch approach to, 321 value stream accounting and, 321–322 weighted-average contribution margin per unit and, 321 weighted-average contribution margin ratio and, 320 Multistage activity-based costing, 147, 148 Murphy, Kevin J., 839n Murphy, M., 696n Music industry, 215 Mutually exclusive projects, 475–476 Myers, S C., 451n N NAFTA See North American Free Trade Agreement (NAFTA) Nardelli, Robert, 832 Needleman, Sarah E., 18n Negotiated-price method for transfer pricing, 803, 804 Nelson, Emily, 66n Nemet, Gregory F., 273n Net book value (NBV), 791–793, 795 Net operating profit after tax (NOPAT), 799–801 Net present value (NPV) capital rationing and, 476 discount rate and, 494 explanation of, 453, 794 mutually exclusive projects and, 475–476 Net present value (NPV) decision model explanation of, 453–454, 472 internal rate of return vs., 457 Net promoter score, 707 Net realizable value (NRV), 234–236, 254 Net working capital, 443 New economy competition in, 34 explanation of, value creation in, 793 NFL, 566 Ng, Serena, 833n Nike, 47, 812 Nissan, 47, 715 Nonconformance costs, 702 Noncontrollable fixed costs, 755 Non-DCF models, 449 Nonfinancial performance indicators business processes and, 677 just-in-time manufacturing and, 567–568 limitations of short-term financial performance indicators and, 564–566 operating processes and, 566–567 processing cycle efficiency and, 568–569 quality and, 689, 691 supplementing financial results with, 604–605 Nonfinancial quality indicators external, 706–707 internal, 705–706 role of, 691, 707–708 Nonlinearity, cost estimation and, 270–271 Nonlinear regression, 277–278 NOPAT See Net operating profit after tax (NOPAT) Nordstrom, 17 Normal capacity, 598 Normal costing explanation of, 97, 102 overhead application under, 98, 102–103 plantwide method of, 103 for process costing, 191–192 Normal spoilage, 110–111, 193 North American Free Trade Agreement (NAFTA), Northern Quest Resort & Casino, 369 Northwestern Mutual, 738 Norton, David P., 44, 54, 440, 738n, 739 Not-for-profit organizations budgets for, 341 capital expenditure analysis in, 441 cost management information and, CVP analysis for, 322 management control in, 761–762 product-line or service-line profitability analysis and, 410 NPV See Net present value (NPV); Net present value (NPV) decision model O O’Byrne, S F., 801n Occupational fraud, 32 O’Connell, Vanessa, 556n Office of Federal Procurement Policy, 19 Ohno, Taiichi, 644n, 713n Olson, S K, 608n Operating budgets, 342–343 Operating-income variance, total, 543, 544, 546, 547 Operating leverage example of, 319 explanation of, 315–318 Operating profit before personnel costs (OPBP), 817 Operational control explanation of, 5, 542, 739 function of, Operational control system, 542–543 Operational performance measurement end-of-period disposition of variances and, 607–610 explanation of, 739 flexible budgets and profit-variance analysis and, 544–558 investigation of variances and, 616–618 management accounting and control systems and, 542–543 nonfinancial-performance indicators and, 564–569 overhead cost variances in traditional ABC systems and, 611–616 productivity analysis and, 644–653 recording standard overhead costs and, 605–607 sales analysis and, 644, 653–664 short-term financial control and, 543–544 standard costs and, 558–564 standard costs in service organizations and, 610–611 standard overhead costs and, 591–593 variance analysis for manufacturing overhead costs and, 593–605 Operational productivity explanation of, 645 partial, 648, 650 Operation costing, 108–109 Operations management, 691–692 Opportunity costs explanation of, 398, 808 relevant cost analysis and, 398–399 Oracle, 47, 832 Order-filling costs, 752 Order-getting costs, 752 Organizational charts, 3, Organizations competitive strategies of, 14–18 cost management and types of, 6–7 Ortiz, John, 139n Outliers, 263, 271 Outsourcing, 750, 752 Overapplied overhead, 104–105 Overhead explanation of, 70 four-variance analysis of factory, 602 overapplied and underapplied, 104–105 variable manufacturing, 592 Overhead application explanation of, 101 under normal costing, 98, 102–103 potential errors in, 105–106 Overhead costs departmental, 104 journal entries and variances for, 605–607 standard, 591–593 variances in, 593–607, 611–616, 626–628 Overhead variances See also Variances alternative analysis of, 602–604 ethics and, 632 Interpretation and implications of variable, 595–596 summary of, 604 total fixed, 596 total variable, 594–595 Overtime premium, 561 P Pagano, M S., 451n Palepu, Krishna G., 841n, 845n Index Pantouvakis, J., 276n Paramount Pictures, 97 Pareto, V., 710n Pareto diagrams, 710 Partial productivity explanation of, 645–647 financial, 648–650 flexible budgets and, 651 limitations of measures of, 650–651 operational, 648, 650 Participative budgeting, 366–367 Participative standards, 559 Passariello, Christina, 515n Patagonia, 49 Patterson, Scott, 833n Payback period, 465–467, 472 Payoff table, 620–621 Pederson, Mark, 839n Penetration, 519 PepsiCo, 48, 800 Performance measurement See also Operational performance measurement; Strategic performance measurement background of, 738–739 employment contracts and, 741–743 explanation of, 739 operation control and management control and, 739–741 Performance quality, 688 Performance shares, 837 Period costs, 77 Periodic inventory system, 81 Perpetual inventory system, 81 Petch, Jason, 314n Petersen, J A., 167n Pharmaceutical industry, 687–688 Phillips, Richard D., 687n Physical measure method, 232–233 Pizzini, Mina J., 759n Planning and decision making function, 4, Plantwide method of normal costing, 103 Political environment, Poon, Aries, 524n Poon, E G., 442n Porter, Michael E., 15n, 16, 35n, 501n Post-audits, 441, 471 Practical capacity, 365, 598, 599 Predatory pricing, 414 Predetermined factory overhead rate, 102 Prediction errors, 616 Predictive analytics, 12 Preferred stock, cost of, 452 Present value (PV), 453, 454n Present value payback period, 467 Present value tables, 477–478 Prevention costs, 700, 701 Price-earnings (PE) ratio, 845 PricewaterhouseCoopers, 797 Pricing cost life cycle and, 519–520 predatory, 414 product life cycle and, 518–522 transfer, 801–811 Prime costs, 60 Principal–agent model, 741–743 Printing company, job costing in, 104, 112 Probabilities decision tables, decision trees and expected value analysis and, 314 indifference, 621–622 Monte Carlo simulation and, 314–315 Process analysis, 139 Process costing activity-based costing and theory of constraints and, 189–190 comparison of methods for, 182–183 cost measurement in, 97 equivalent units and, 170–171 explanation of, 97, 169 FIFO method for, 173, 177–183, 186–189 flow of costs in, 171 journal entries for, 189 just-in-time systems and backflush costing and, 190–191 with multiple departments, 184–189 normal and standard, 191–192 spoilage in, 193–195 steps in, 171–173 use of, 170 weighted-average method for, 173–177, 182–186 Process Industry Practices (PIP), 170 Processing costs, separable, 406 Processing cycle efficiency (PCE), 568–569 Process map, 140 Procter & Gamble (P&G), 14, 47, 66 Product costing control purposes vs., 592 explanation of, 77 fixed manufacturing, 593 Production, excess, 609 Production budget, 346–348 Production constraints, 410–414 Production cost report, 171–172 Production departments cost allocation to, 216–218 cost centers in, 748–749 Production volume variance explanation of, 596–598, 614 fixed, 599–600 interpretation of, 600–601 Productivity capacity utilization and, 652, 671 determinants of, 644–645 explanation of, 645 financial, 645 law of diminishing marginal, 71 measurement of, 643, 645–647, 653, 666 methods to improve, 646 operational, 645 partial, 645–651 total, 646, 651–653 Productivity analysis flexible budget in, 644–645 partial productivity and, 645–651 total productivity and, 646, 651–653 Product leadership, 16 Product-level activities, 133, 310–311 Product life cycle See also Strategic pricing management compensation and, 831–832 management control and, 743 strategic pricing using, 518–522 Product-line or service-line profitability analysis 887 keep or drop a product or service and, 408–410 service and not-for-profit organizations and, 410 Product mix, 513 Professional organizations, for management accountants, 18–20 Profitability cost structures and, 310 economic value added and, 470 price setting for, 521 quality and, 685–686 Profitability index (PI), 472 Profit centers contribution income statement and, 754–758 explanation of, 746 strategic role of, 752–754 Profit equation, 304 Profit planning See also Cost-volume-profit (CVP) analysis cost planning and, 306–309 income taxes and, 310 revenue planning and, 306 Profit-volume graph, 304–306 Project costing, 106 Public Company Accounting Oversight Board (PCAOB), 19 Pull method, 97 Push method, 97 p-value, 266 Q Qi, H., 461n Quality accounting role in management and control of, 686–688 business processes knowledge and, 689–690 correction of poor, 709–713 cost of, 691, 699–704 design, 688 detection of poor, 708–709 explanation of, 688 feedback loops and, 691 financial component and, 691 goalpost versus absolute conformance standards and, 694–696 ISO 9000 and ISO 14000 and, 685 lean manufacturing and, 713–716 Malcolm Baldrige National Quality Program and, 59, 684–685 meaning of, 688–689 nonfinancial indicators and, 691, 705–708 operations management and, 691–692 performance, 688 profitability and, 685–686 relevant cost analysis and, 691 role of customer and, 690–691 Six Sigma approach and, 691–694 strategic importance of, 684–686 Taguchi quality loss function and, 696–699 Quality circle, 700, 701 Quality function deployment (QFD), 507–509, 517–518, 532–533 Quality loss function (QLF) explanation of, 697 tolerance determination and, 699 total and average, 697–698 888 Index Quality tolerance, 694 QualPro Inc., 693 Quintiles, 54 R Raiborn, Cecily, 64 Rajan, Bharath, 143n Raman, A., 685n Ramsey, M., 689n, 705n, 751n Rapoport, Michael, 835n Ray, S., 568n Real assets, 462 Real options capital-budgeting process and, 461–463 determinants of value of, 465 explanation of, 462 types of, 462 Reciprocal flows, 219 Reciprocal method, of departmental cost allocation, 223–225 Recycling, 196 Reed, M., 461n Reeves, Martin, 48n Refurbish decisions, 402 Regression cross-sectional, 270 multiple, 262 nonlinear, 277–278 simple, 262 time-series, 270 Regression, least squares, 262 Regression analysis applications for, 267 in construction industry, 268, 276 dependent variable and, 263–264 to estimate maintenance costs, 266–268 evaluation of, 264–266 explanation of, 262–263 in gaming industry, 270 independent variable and, 264 use of Excel for, 268–269 using data on management compensation, 861–862 Reich, Robert B., 832n Reichheld, F., 707n Relative performance (improvement) contracts, 368–369 Relevant cost analysis batch-level cost drivers and, 397–398 decision making and, 699–700 depreciation expense and, 398 make, lease, or buy decisions and, 403–406 opportunity costs and, 398–399 quality and, 691 relevant costs information and, 395–397, 441 sell before or after additional processing decisions and, 406–407 special order decisions and, 400–401 strategic cost analysis vs., 399 time value of money and, 399 Relevant costs, 395–397 Relevant range application of, 261 CVP analysis and, 322–323 explanation of, 71–72 Replacement cost, 792, 793 Report to the Nation (Association of Chartered Fraud Examiners), 32 Resale-price method, 808 Research and development, 29 Residual income (RI) advantages of, 796, 798 calculation of, 799 explanation of, 796 limitations of, 797–798 time period analysis and, 797 Resource-capacity planning, 365, 599 Resource consumption accounting (RCA) ABC analysis and, 615–616 explanation of, 148 Resource consumption cost drivers, 130 Resource costs, 132–133 Resources, in activity-based costing, 130 Retail firms cost and revenue centers in, 747 online, 307 Retirement planning, 459 Return on investment (ROI) advantages and disadvantages of, 798, 820 for college degree, 791 for employee wellness programs, 821 explanation of, 469–470, 786–787 financial-performance evaluation using, 787–789 human capital, 797 measurement issues and, 788, 790–793 strategic analysis using, 788, 792 strategic issues in use of, 793–795 Return on sales (ROS), 787–789 Revenue centers explanation of, 746 function of, 751–752 in retail firms, 747 Revenue drivers, 751 Revenue methods, 237, 239–240 Revenue planning, 306 Revill, John, 792n Rework, 111 Reynolds, B., 276n RI See Residual income (RI) Rich, S P., 454n Richardson, Karen, 693n Richtermeyer, Sandra, 5n Risk See also Uncertainty in automobile industry, 696 CVP analysis and, 313–318 explanation of, 313 just-in-time manufacturing and, 568 margin of safety and, 315 transfer pricing and, 807, 811 Risk aversion employment contracts and, 741 management compensation and, 832 Ritz-Carlton Hotels, 13 Robots, 307 Rockhoff, J D., 689n, 703n Rodger, Chris, 314n Rogers, Christina, 597n, 652n Rogers, Will, 20 Rohwedder, Cecilie, 515n ROI See Return on investment (ROI) Rolling financial forecasts, 368–369 Rose, J T., 454n Ross, Elliot, 521n Roth, H P., 696n, 698 Royal Bank of Canada, 145 Royal Dutch Shell, 196, 460 Rozycki, John, 461n R-squared, 264–265 Rubin, B F., 689n Rudisill, F., 692 Run charts, 708 Ryan, G P., 450n, 451n Ryan, P A., 450n, 451n Ryan, Vincent, 795n S Saatchi & Saatchi, 738 Salaries cost planning and, 308–309 explanation of, 831 Sales return on, 787–789 what-if analysis of, 313–314 Sales analysis flexible budgets and, 644–645 master budgets and, 653–662 prior year results comparisons and, 662–664 sales quantity variance partitioned into market size and market share variances and, 657–661 sales volume variance partitioned into sales quantity and sales mix variances and, 654–657 strategic decision-making and, 661–662 Sales basket approach, 321 Sales budget, 345, 346 Sales commission, cost planning and, 308–309 Sales forecasts, 345–347 Sales growth, measurement of, 643 Sales life cycle explanation of, 501 strategic pricing for phases of, 520–521 Sales mix CVP analysis and, 319–320 explanation of, 319, 654 Sales mix variance, 654–657, 664 Sales quantity variance calculation of, 655–657 explanation of, 654 partitioned into market size and market share variances, 657–661 Sales-sustaining cost, 144 Sales value at split-off method, 233–234 Sales volume variance explanation of, 546 partitioned into sales quantity and sales mix variances, 654–657 total flexible-budget variance and, 546–558 Samsung Electronics, 48, 50 Sandino, Tatiana, 747n, 772, 773 Sanyo Corporation, 204 Sarbanes–Oxley Act of 2002, 19, 849 SAS Institute, 47 Savage, Helen M., 378, 379 Scannell, Kara, 831n Scenario analysis budgeting and, 360 capital-budgeting process and, 460 explanation of, 460 Index Schechner, Sam, 463n Scheck, Justin, 524n Schmidt, Charles, 516n Schulist, Stephen, 142n Schwartz, Nelson D., 846n Scott, J A., 450n Scott, Lee, 47 Scrap, 111 Sears, 16 Securities and Exchange Commission (SEC), 19, 831 Segarra, M., 609n Selling and administrative expense budget, 352–353 Selling, general, and administrative (SG&A) expenses, 809 Sellingo, J J., 791n Selling price variance analysis of, 662–664 explanation of, 548–549 Selling volume variance, 662–664 Sensitivity analysis budgeting process and, 359–360 capital-budgeting process and, 458–461 decision tables/decision trees/expected value analysis and, 314 explanation of, 313 in graphical format, 316–317 Monte Carlo simulation and, 314–315 what-if analysis of sales and, 313–314 Separable processing costs, 232, 406 Service departments cost allocation to, 216–218 explanation of, 214 Service organizations budgeting in, 360–362 cost allocation in, 229–231 cost flows in, 77–80 cost management information and, job costing in, 106–107 management compensation in, 839–840 product-line or service-line profitability analysis and, 410 standard costs in, 610–611 Seventh Generation, Inc (SGI), 54–55 Shakespeare, William, 256 Shapiro, Benson, 521n Shared assets, 790–791 Shared services, 214 Shih, Willy C., 494–495 Shiller, Robert, 846n Short-Elliott-Hendrickson, Inc (SEH), 839–840 Short-term financial control, 543–544 Short-term financial performance indicators, 564–566 Short-term objectives, master budget and, 342–343 Short-term profit planning See Cost-volumeprofit (CVP) analysis Showalter, S., 605n Sibony, Olivier, 415n Siegel, Gary, 5n Sierra Nevada, 795 Silver-Greenberg, Jessica, 839n Simon, Stephanie, 300n Simple regression, 262 Simultaneous engineering, 505 Singtex, 18 Six Sigma approach, 691–694 Skimming, 519 Slack time, 523 Slagmulder, Regine, 505n, 516n Slaughter, Matthew J., 645 Sloan, Alfred P., 399 Smith, A., 833n Smith, Carl S., 615n Smith, R., 403n Smith, Rebecca, 522n Smith Fabrication, Inc., 96 Snead, K., 601n, 623n, 634n Social environment, Social performance indicators (SPIs), 49 Social Security benefits, 309 Society of Management Accountants of Canada (CMA-Canada), 5, 20 SofTech, Inc., 273–274 Software See also Excel (Microsoft) capital-budgeting simulation, 461 database, 98–99 sustainability scorecard, 47 that calculates company’s WACC, 453 SolarCity Corporation, 403 Solvay, 54 Solver (Microsoft Excel), 225, 226, 416–417 Sony, 715 Sorensen, James E., 5n Souki, Charif, 837 Southwest Airlines, 16n, 280 Spanish Management Accounting Association, 20 Special order decisions explanation of, 400 relevant cost analysis and, 400–401 strategic analysis and, 401–402 value stream accounting and, 402–403 Speed-to-market, Spending variances, 614, 615 Spicer, Barry H., 803n SPIRE (Sustainable Process Industry through Resource and Energy Efficiency), 196 Split-off point, 232, 406 Spoilage abnormal, 110, 111, 193 in job costing, 110–111 normal, 110–111, 193 in process costing, 193–195 Spring-loading, 849 Sprinkle, G B., 616, 623n Srinivason, A., 685n Staats, B R., 735 Standard costs establishment of, 560–561 expectations for, 558–559 explanation of, 97, 549, 558, 591 partial productivity, flexible budgets and, 651 for process costing, 191–192 in service organizations, 610–611 standard cost systems vs., 558 standard-setting procedures and, 559 Standard cost sheet, 561 Standard cost system direct labor cost in, 563–564 direct materials cost in, 562–563 explanation of, 558 function of, 561–562 889 production completion and, 564 standard costs vs., 558 Standard error of the estimate (SE), 265 Standard overhead costs, 591–593 Stanford, Duane, 48n Staples Inc., 307, 834 Starbucks, 514 Starwood Hotels and Resorts Worldwide, Inc., 693 Statement of Ethical Professional Practice (Institute of Management Accountants), 21–22, 383, 577, 634 Statements on Management Accounting (Institute of Management Accountants), 3, 20 Static budgets, 544 Static budget variance, 543 Statistical control charts, 618, 709 Stein, D., 712n Step costs CVP analysis and, 322–323 explanation of, 73–74 Stephan, J., 461n Step method of departmental cost allocation, 221–223 explanation of, 217n Stevens, Laura, 404n Stevenson, Seth, 49n Stewart, G Bennett, III, 799n, 801n Stiglitz, Joseph, 64 Stock options, 837, 840, 849 Stock/stock prices common, 452 management compensation and, 835, 837, 840 preferred, 452 Stott, D., 601n, 623n, 634n Stout, D E., 440n, 441n, 451n, 461n Strack, Rainer, 817n Strategic analysis explanation of, 399 make, lease, or buy decisions and, 406 product-line profitability and, 409–410 relevant cost analysis vs., 399 sell before or after additional processing decisions and, 407 special order decisions and, 401–402 strategic decision making and, 399, 401–402, 406, 407, 409–410 SWOT analysis and, 35–37 using return on investment, 788, 792 Strategic budget expenditures, 342 Strategic business units (SBUs) cost centers as, 745–751 explanation of, 740–741 investment centers as, 746 profit centers as, 746, 752–758 revenue centers as, 746, 747, 751–752 types of, 745–746 Strategic control system, 440 Strategic decision making See also Decision making in business valuation, 848 capital budgeting and, 442 in computer manufacturing, 40–41 in CVP analysis, 318–319 identification of relevant factors and, 415 make, lease, or buy decisions and, 403–407 890 Index Strategic decision making—Cont multiple products and limited resources and, 410–414 predatory pricing practice and, 414 product-line or service-line profitability analysis and, 408–414 product-mix problems and, 416–418 quality and, 687–688 relevant cost analysis and, 395–401, 403–407 replacement of variable costs with fixed costs and, 414 sales analysis and, 661–662 to sell before or after additional processing, 406–407 special order decisions and, 401–403 steps in, 17–18, 394–395, 442, 661–662 strategic analysis and, 399, 401–402, 406, 407, 409–410 strategic objectives and, 414 value stream accounting and, 402–403 volume-based costing and, 137–138 Strategic management cost management and strategic emphasis in, 5–6 explanation of, 4–5 Strategic performance measurement background of, 738–739 balanced scorecard and, 746, 758–761 cost centers and, 747–751 decentralization and, 745 explanation of, 739, 745 investment centers and, 784–801 management compensation and, 835 management control and, 761–762 profit centers and, 752–758 revenue centers and, 751–752 strategic business units and, 745–746 transfer pricing and, 801–812 Strategic pricing analytical and peak pricing methods and, 521–522 for phases of sales life cycle, 520–521 using product life-cycle, 518–522 Strategies, 14 Strategy map balanced scorecard vs., 41–42 explanation of, 10–11, 45 illustration of, 45–47 implementation of, 759 sustainability and, 47–49 Stratton, W., 761n Strout, David E., 274n Structural cost drivers, 75–76 Subramanyam, K R., 841n Suessmair, Augustin, 148 Sullivan, Scott, 833 Sunk costs, 395 Suppliers, 36 Supply-chain risk, 568 Supply chains, 560 Support departments, 748–749 Sustainability budgeting and, 342 certification of, 49 explanation of, 14, 47 flexible budgets and, 605 football teams and, 566 investment evaluation and, 495 planning and policy execution for, 196 process cost information and, 173 return on investment and, 795 strategic decision making and, 397, 402, 403, 405 strategic management and, 47–49 Sustainability scorecard software, 47, 173 SWOT analysis critical success factors and, 36, 37 explanation of, 35–36 Systematic variance, 616, 617 T Taguchi, Genichi, 696, 697 Taguchi quality loss function explanation of, 696–697 tolerance determination and, 699 total loss and average loss and, 697–698 Takt time, 513–514 Target Corp., 2, 17, 24, 689, 693 Target cost formula, 502 Target costing benefits of, 509 comparison of, 504, 505 explanation of, 12, 501–502 in health product manufacturing, 506–507 kaizen and, 506 quality function deployment and, 507–509 review of, 530–531 use of, 500, 502–503 value engineering and, 503–505 Taxes See Income taxes Tax planning, 838–839 Taylor, William, 760n Teach for America, 738 Team-based management (TBM) programs, 744 Technological innovation, 561 Terlep, Sharon, 142n Texas Instruments, 669 Theoretical capacity, 598 Theory of constraints (TOC) activity-based costing and, 189–190, 516 explanation of, 13 in health product manufacturing, 510–511 introduction to, 509–510 steps in analysis using, 511–515 Theory of constraints (TOC) reports, 515–516 Thomas, M., 551n Thomasville Furniture Industries (TFI), 98, 99, 103, 104 3M, 817 Three-variance analysis, 602 Throughput margin, 513 Thurm, Scott, 835n Tiffany’s, 29 Time-driven activity-based budgeting (TDABB), 364–365 Time-driven activity-based costing (TDABC), 149–150 Time-series regression, 270 Time ticket, 100 Time value of money, 399 TOC See Theory of constraints (TOC) Togo, D F., 460n Tolerances, 694, 699 Torres, Craig, 646n Total contribution margin, 301 Total fixed costs, 72 Total fixed overhead variance, 596 Total flexible-budget variance, 548, 604 Total manufacturing cost, 80 Total operating-income variance, 543, 544, 546 Total productivity explanation of, 646, 651–652 limitations of, 652–653 Total quality management (TQM) explanation of, 13, 684 lean manufacturing and, 713 Total variable cost flexible-budget variance, 549–550 Total variable overhead variance, 594–595 Toyota Motor Company, 14, 47, 48, 418, 500, 502, 601, 689, 713, 715, 817 Transfer pricing administered, 803n advance pricing agreements and, 811 explanation of, 801 in federal government, 803 general transfer-pricing rule and, 807–808 international issues in, 808–811 methods of, 803–807 objectives of, 802 risk and, 807, 811 use of, 801–802 Transferred-in costs, 171, 184 Trend variable, 271 Trigeorgis, Lenos, 463n Trottman, Melanie, 418n Tsai, Ting-I, 524n t-values, 265 Two-stage cost assignment, 130–132 Two-variance subdivision of total overhead variance, 602, 604 Tyco International, 833 U Uchitelle, Louis, 646n Uncertainty See also Risk budgeting process and, 356–360 capital-budgeting process and, 458–465, 469 decision tables/decision trees/expected value analysis and, 314 employment contracts and, 741 explanation of, 313 intolerance of, 469 margin of safety and, 315 Monte Carlo simulation and, 314–315 operating leverage and, 315–318 scenario analysis and, 360 sensitivity analysis and, 359–360 variance-investigation decisions under, 620–622 what-if analysis and, 313–314, 356–359 Uncontrollable variances, 616, 617 Underapplied overhead, 104 Undercoffler, David, 504n Unit-based pools, 836, 837 Unit costs, 74 United Health Group (UHG), 29 United Parcel Service (UPS), 669 United States Agency for International Development (USAID), 803 Index Unit-level activities, 133 Units accounted for, 175 Units to account for, 174 Unit variable costs, 72 UPS (United Parcel Service), 738, 739 Upton, D M., 735 U.S Bureau of Labor Statistics, 670, 671 U.S Council of Catholic Bishops, 379 U.S Department of Agriculture (USDA), 185 U.S Department of Education, 688 U.S Patent and Trademark Office (PTO), 141 V Valuation See Business valuation Value activities, analysis of, 40, 41 Value-added analysis, 140–141 Value-based management, 799 Value chain See also Cost life cycle explanation of, 11–12, 39, 501n upstream and downstream phases of, 517, 518 Value-chain analysis in computer manufacturing, 39–41 explanation of, 38–39 steps in, 39–40 Value creation, in new economy, 793 Value engineering, 503–505 Value propositions, 36 Value-stream accounting CVP analysis and, 321–322 explanation of, 714–716 Value streams contribution income statement and, 758 explanation of, 67, 402 lean accounting and, 13, 714, 715 special order decision and, 402–403 van der Merwe, Anton, 615n Variable costing, 593n, 755–757 Variable-cost method for transfer pricing, 803, 804 Variable costs cost planning and, 306–308 explanation of, 72–73 fixed costs replacing, 414 management of, 304 relevant, 395–396 unit, 74 Variable cost variances analysis of, 550–551, 664 graphical analysis of, 626–627 Variable overhead cost analysis, 594–595 Variable overhead efficiency variance, 594, 596 Variable overhead spending variance explanation of, 594 implications of, 595–596 Variable overhead variances interpretation and implications of, 595–596 total, 594 Variables dependent and independent, 262–264 trend, 271 Variable setup spending variance, 615 Variance analysis flexible budgets and, 544–558 for manufacturing overhead costs, 593–605 media advertising campaigns and, 551 Variances See also Overhead variances ABC systems and, 611–616 causes and controllability of, 616–617 control charts and, 617–618 direct labor, 554–557 direct materials, 551–554 end-of-period disposition of, 607–610 explanation of, 542 fixed overhead spending (budget), 600–602 fixed-spending, 615 flexible-budget, 548–558, 604 market size, 658–659 master budget, 543 materials purchase-price, 550 price, 550 production volume, 596–601, 614 quantity, 550 sales mix, 654–657, 664 sales quantity, 654–661, 664 sales volume, 546–548, 654–657 selling price, 662–664 selling volume, 662–664 spending, 614, 615 systematic, 616, 617 timing of recognition of, 557–558 total operating-income, 543, 546, 547 total variable overhead, 594–595 uncertainty and, 620–622 uncontrollable, 616, 617 variable cost, 550–551, 626–627, 664 variable overhead efficiency, 594, 596 variable overhead spending, 594–596 variable setup spending, 615 Velken, Ingrid, 48n Venkatachalam, Mahan, 833n Venkatraman, N., 763n VF Corp., 304 Vlasic, Bill, 644n, 689n Volkswagen, 48 Volume-based cost drivers capacity vs usage of costs and, 74–75 explanation of, 71–72 fixed and variable costs and, 72–73 step costs and, 73–74 unit cost and, 74 Volume-based costing activity-based costing vs., 129, 134–137 example of, 135 explanation of, 71, 216 Vora, Shivani, 305n W Wakabayashi, D., 568n Walmart, 2, 14, 16, 17, 24, 47, 48, 54, 55, 705 Wang, Ucilia, 561n Ward, Lisa, 561n Warren, Neil, 267 Watkins, Sherron, 22 Weaknesses, SWOT analysis and, 35 Webber, Sally A., 615n Weber, Lauren, 556n Weighted-average contribution margin per unit, 319, 321 Weighted-average contribution margin ratio (CMT), 319–320 Weighted-average costs of capital (WACC) 891 business valuation and, 845 estimation of, 451–453 explanation of, 451 Weighted-average method explanation of, 173 FIFO methods vs., 182–183 in process costing, 174–177, 184–186, 194 Weise, K., 47n, 688n Weiss, Dan, 803n Welch, Jack, Wessel, David, 643n Westinghouse Air Brake Company, 559 What-if analysis budgeting process and, 356–359 capital-budgeting process and, 458–460 explanation of, 313–314 Whirlpool Corp., 693 Whitehouse, K., 459n Whole Foods Markets, 316 Whoriskey, Peter, 666n Whyte, G., 469n Wild, John J., 841n Wilkinson, A., 460n Williamson, James W., 44n Wilson, Joel, 192n Winkler, Conrad, 142n, 715n Wong, Betty, 190n Work-in-Process Inventory, 171, 176, 181–182 WorldCom, 833 The World Is Flat (Friedman), 17, 406 World Trade Organization (WTO), 7, 83 Wu, Y., 696, 697 X Xanga, 834 Xerox Corporation, 13, 693, 752 Xie, Y A., 461n Y Yadron, D., 807n Yang, Lin, 18n Yermack, David, 849n Yglesias, Matthew, 316n Yield-to-maturity, 452 Yoo, J Y., 442n Young, D S., 801n Young, David W., 803n Yuthas, Kristi, 47n, 782 Z Zeithami, Valerie, 146n Zelman, William N., 240n Zenhaus, R., 276n Zero-based budgeting (ZBB), 362 Zhou, A., 276n Zimmerman, Eilene, 521n Zipcar, 88, 305 Zivney, T., 300n, 318n Zuckerman, G., 605n ... International Accounting, Behavioral Research in Accounting (BRIA), The CPA Journal, Educational and Psychological Measurement, the IMA Educational Case Journal, Managerial Finance, Management Accounting,... STRATEGY, COST MANAGEMENT, AND COST SYSTEMS Chapter Cost Management and Strategy Management Accounting and the Role of Cost Management The Global Business Environment Lean Manufacturing Use of Information... Education, The CPA Journal, and Strategic Finance He has made numerous presentations at meetings of both the American Accounting Association (AAA) and the Institute of Management Accountants (IMA)