Ebook Cost accounting - Foundations and evolutions (8th edition): Part 2

(BQ) Part 2 book Cost accounting - Foundations and evolutions has contents: Introduction to cost management systems; responsibility accounting, support department cost allocations, and transfer pricing; managing costs and uncertainty; implementing quality concepts; inventory and production management,...and other contents.

11 Allocation of Joint Costs and Accounting for By-Product/Scrap Objectives After completing this chapter, you should be able to answer the following questions: LO.1 LO.2 PANCAKETOM/DREAMSTIME.COM LO.3 LO.4 LO.5 How are the outputs of a joint process classified? What management decisions must be made before beginning a joint process? How is the joint cost of production allocated to joint products? How are by-product and scrap accounted for? How should not-for-profit organizations account for the cost of a joint activity? 475 476 Chapter 11 Allocation of Joint Costs and Accounting for By-Product/Scrap Introduction Most companies produce and sell multiple products Some companies engage in multiple production processes to manufacture a variety of products; other companies have a single process that simultaneously generates different outputs For example, a chicken processing plant generates whole chickens, chicken parts, ground chicken, and fertilizer from a single input Similarly, crude oil refining can produce gasoline, motor oil, heating oil, and kerosene; mining can produce copper, silver, and gold A joint process is one during which one product cannot be manufactured without producing others Such processes are common in the food, extractive, agricultural, and chemical industries Additionally, the process of producing first-quality merchandise and factory seconds in a single operation can be viewed as a joint process For example, if a manufacturing process is unstable in that it cannot “maintain output at a uniform quality level, [then] the products that emerge from the [process] vary across one or more quality dimensions.”1 This chapter discusses joint manufacturing processes, their related product outputs, and the accounting treatment of the costs of those processes Costs incurred for material, labor, and overhead during a joint process are referred to as the joint cost of the production process Joint cost is allocated only to the primary products of a joint process using either a physical or a monetary measure Although joint cost allocations are necessary to determine financial statement valuations, such allocations should not be used in making internal decisions.2 For example, in evaluating a specific joint product’s profitability, the decision maker must understand that the product’s profitability is determined largely by the method used to allocate the joint cost and that allocation process is always arbitrary to some extent Following incurrence of the joint cost, additional separate costs that are assignable to specific products may be incurred in later production stages In addition, advertising and marketing expenditures can be joint costs For example, a not-for-profit (NFP) organization could produce a brochure that serves the concurrent purposes of providing public service information and requesting donations Joint costs for NFPs are covered in the last section of the chapter LO.1 How are the outputs of a joint process classified? Outputs of a Joint Process A joint process inevitably produces more than one product line A product that results from a joint process and that has a sales value is classified as • a joint product (also called a primary product, main product, or co-product), • a by-product, or • scrap Joint products are the primary outputs of a joint process Joint products have substantial revenue-generating ability and, as such, provide the financial motive for entering into the production process Joint products include similar products of differing quality that result from the same process For example, a poultry processor generates different grades of turkeys, and, depending on certain characteristics defined by the U.S Department of Agriculture, ready-to-cook poultry is graded as A, B, or C quality In contrast, by-product and scrap are incidental outputs of a joint process Both are salable, with by-products having a higher sales value than scrap However, the sales values of these products alone would not be sufficient for management to undertake the joint James F Gatti and D Jacque Grinnell, “Joint Cost Allocations: Measuring and Promoting Productivity and Quality Improvements,” Cost Management (July–August 2000), pp 13–21 Sometimes correctly pricing a product depends on knowledge of the full cost of making the product, particularly when contractual agreements require cost-plus pricing Joint cost allocation is also necessary to the costing of products for financial reporting process For example, Perdue Farms would never undertake poultry processing simply to generate the by-product that is made into fertilizer or livestock feed Krispy Kreme would never undertake doughnut manufacturing to generate the doughnut holes sold to customers Weyerhaeuser would never undertake lumber production merely to generate the bark that is burned to produce power and steam A final residual output from a joint process is waste, which has no sales value The expense incurred in waste disposal may exceed its production costs in some industries However, many companies have learned either to minimize their production waste by changing their processing techniques or to reclassify waste as by-product or scrap by finding a use that generates some minimal amount of revenue Over time, a product classification may change because of technology advances, consumer demand, or ecological factors New joint products may be developed from a product, as illustrated in the ever-growing list for soybeans (Exhibit 11–1) Some products originally classified as by-products can be reclassified as joint products, and some joint products can be reduced to the by-product category Even products originally viewed as scrap or waste can be upgraded Exhibit 11–1 Products from Soybeans Soy Foods Nonedible Products Animal feed Adhesives Butter Biodiesel fuel Cereals Building materials Chocolate coatings Candles Coffee Cosmetics Flour Crayons Milk and creamers Disinfectants Oil Fiber (Yarn) Sauce Foam for furniture Sausage casings Electrical insulation Salad dressing Leather substitute Tofu Lubricants and hydraulic fluids Paints and coatings Pesticides and herbicides Pharmaceuticals Plastics Printing inks Road materials Rubber Shampoo and detergent Solvents 477 JASON ALAN/ISTOCKPHOTO.COM Chapter 11 Allocation of Joint Costs and Accounting for By-Product/Scrap Instead of throwing away dayold bread or bagels, a bakery may decide to use them to make croutons, allowing what would have been waste to be reclassified as a by-product or scrap 478 Chapter 11 Allocation of Joint Costs and Accounting for By-Product/Scrap to joint product status For example, years ago, poultry processors considered chicken litter, bones, beaks, and feet to be waste These items are now recycled and processed further to produce valuable organic fertilizer and, therefore, may be classified as either by-product or scrap Furthermore, chicken litter can, when gasified, be used to produce electricity Joint process output is classified based on management’s judgment about the relative sales values of outputs Classifications are unique to each company For example, assume that Companies A and B are both poultry processors Company A might classify whole chickens and breast meat as joint products and all other chicken parts as by-product, whereas Company B might classify whole chickens, thighs, legs, and wings as joint products and all other chicken parts as by-product These classifications could be based on the fact that Company A’s processing facilities are only large enough to clean the chickens and remove the breast section; any additional processing would require a capital investment that would not be cost beneficial Company B could have significantly larger facilities that allow further processing at costs substantially below the sales values of the multiple products The Joint Process Joint products are typically manufactured in companies using mass production processes and a process costing accounting method Exhibit 11–2 shows that the outputs of steer processing include a wide variety of meat cuts for retail sales (joint products); fat, entrails, bones, Exhibit 11–2 Illustration of Joint Process Output 615 lb Carcass 61.5% of Live Weight 432 lbs Retail Beef • Steaks • Roasts • Ground Beef 183 lbs fat bone waste 27 lbs variety meats Beef By-Products 568 lbs 358 lbs hide and hair, bones, horns, inedible glands and organs 1000 lb Steer Beef By-Products and Scrap Fats and Fatty Acids • Explosives • Chewing gum • Paints • Dog food • Tires Intestines • Sausage casings • Instrument strings • Surgical sutures • Tennis racquet strings Hide and Hair • Clothing • Saddles • Insulation • Luggage • Artist’s brushes Bones, Horns, and Hooves • Combs & toothbrushes • Dog biscuits • Piano keys • Ice cream • Shampoo & conditioner Source: http://www.cdfa.ca.gov/ahfss/Meat_and_Poultry_Inspection/By_Products.html (last accessed 10/15/09) Manure • Methane gas • Urea fertilizer Chapter 11 Allocation of Joint Costs and Accounting for By-Product/Scrap 479 horns, and hooves that are classified as by-product or scrap; and some nonusable waste that is discarded The point at which joint process outputs are first identifiable as individual products is called the split-off point A joint process can have one or more split-off points, depending on the number and types of output produced Output may be sold at the split-off point (if a market exists for products at that degree of completion) or may be processed further and then sold Joint cost includes all direct material, direct labor, and overhead costs incurred up to the split-off point Financial reporting requires that all necessary and reasonable costs of production be attached to products Joint Cost Rationale Allocated only to joint products Necessary for financial statement valuations at split-off point Underlying financial motivation for undertaking the production process Not relevant for internal decision making because, at split-off, joint cost is a sunk cost Not allocated to “other” output Not cost beneficial Not significant to production process decision If joint output is processed beyond the split-off point, additional costs will be incurred and must be assigned to the specific products for which those costs were incurred Exhibit 11–3 (p 480) illustrates a joint process with multiple split-off points and the allocation of costs to products For simplicity, the joint process shows no by-product production Some scrap and waste are produced from Joint Process but no joint cost is assigned to such output Note that joint products B and C of Joint Process become direct material for Joint Process For accounting purposes, the joint cost allocations will follow products B and C into Joint Process 2, but these allocated costs should not be used in making decisions about further processing in Departments 2, 3, or Such decisions should be made only after considering whether the expected additional revenues from further processing are greater than the expected additional costs The Joint Process Decision Exhibit 11–4 (p 481) indicates the four management decision points in a joint production process Before committing resources to a joint process, management must first decide whether total expected revenue from selling the joint output “basket” of products is likely to exceed total expected processing cost, which includes • joint cost, • separate processing costs after split-off, • selling expenses for the goods, and • disposal costs for any waste materials If total anticipated revenue exceeds all anticipated costs, managers should compare the income from this use of company resources to that provided by the best alternative use If the joint process income exceeds that of the best alternative, management would decide that this production process is the best capacity use and would begin production The next two decisions are made at split-off The third decision is to determine how to classify joint process outputs This classification decision is necessary because joint cost is assigned only to joint products Prior to allocation, however, the joint cost may be reduced by the sales value of any by-product or scrap (as discussed later in the chapter) LO.2 What management decisions must be made before beginning a joint process? 480 Chapter 11 Allocation of Joint Costs and Accounting for By-Product/Scrap Exhibit 11–3 Model of a Joint Process Department JOINT PROCESS Incur DM, DL, and OH costs for joint products WASTE SCRAP No joint cost allocated; discarded with no sales value and possible disposal costs incurred Split-off point; joint products A, B, and C are produced Allocate costs of Joint Process to joint products A, B, and C Department PRODUCT A PROCESSING Product A is separately processed further; additional costs of DM, DL, and OH are assignable only to Product A Product A is warehoused or sold No joint cost allocated; minimal sales value Department JOINT PROCESS PRODUCTS B and C PROCESSING Incur DM, DL, and OH costs for joint products B and C Split-off point; allocate costs of Joint Process to joint products B and C Product B is warehoused or sold at split-off point Department PRODUCT C PROCESSING Product C is separately processed further; costs of DM, DL, and OH are totally assignable only to Product C Product C is warehoused or sold The fourth decision is the most complex Management must decide whether to sell (any or all of ) the joint output at split-off or to process it further If joint products are salable at split-off, further processing should be undertaken only if the value added to the product, as reflected by the incremental revenue, exceeds the incremental cost.3 If a primary product is not salable at split-off, additional costs must be incurred to make that product salable For other output, management must also estimate whether the See Chapter 10 for a detailed discussion of incremental and relevant costs Chapter 11 Allocation of Joint Costs and Accounting for By-Product/Scrap 481 Exhibit 11–4 Decision Points in a Joint Production Process (1) Revenues Ͼ expenses for basket of goods? NO Do not produce YES (2) NO Best use of facilities? Do not produce YES Begin production and incur costs for material, labor, and overhead SPLIT-OFF POINT (3) Joint Product? NO Are added revenues after additional processing Ͼ additional costs? YES Allocate joint cost Salable? NO YES (4) Incremental profit after additional processing Ͼ zero after split-off? YES Incur additional costs NO Sell at split-off Sell NO Sell at split-off 482 Chapter 11 Allocation of Joint Costs and Accounting for By-Product/Scrap incremental revenue from additional processing will exceed the additional processing cost Nonprimary output should be processed further only if additional processing provides a net monetary benefit The following example illustrates a further processing decision Assume that a whole chicken sells for $0.96 per pound at split-off The minimum selling price for edible chicken parts after further processing is $1.06 per pound Incremental revenue ϭ $1.06 Ϫ $0.96 ϭ $0.10 If no weight is lost in additional processing and the cost is less than $0.10 per pound, additional processing should occur At the split-off point, the joint cost cannot be recouped and, thus, is a “sunk” cost The only relevant items in the decision to process further are the incremental revenue and incremental cost In making decisions at any potential sales point, managers must have a reasonable estimate of each joint output’s selling price Expected selling prices should be based on both cost and market factors In the long run, the product selling prices and volumes must be sufficient to cover their total costs However, current economic influences, such as competitors’ prices and consumers’ sensitivity to price changes, must be considered when estimating selling prices and forecasting revenues LO.3 How is the joint cost of production allocated to joint products? Allocation of Joint Cost Harkins Poultry is used to demonstrate alternative methods of allocating joint processing cost The company manufactures three primary products from a joint process: turkey breasts, ground turkey, and whole turkeys (All remaining parts are considered byproducts of the joint process.) Joint products can be either sold at split-off or processed further at an additional cost Breasts can be processed further to produce deli meats; ground turkey can be processed further into turkey sausage; whole turkeys can be processed further to make precooked or marinated roasters Certain marketing and disposal costs for advertising, commissions, and transportation are incurred regardless of when the products are sold Exhibit 11–5 provides assumed information on Harkins Poultry’s processing operations and joint products for October 2010 The company started processing 10,000 tons of turkey during that month Approximately 10 percent of the tonnage started will become a by-product to be used in fertilizer pellets Thus, the 10,000 tons of input results in 9,000 tons of joint product output and 1,000 tons of by-product Physical Measure Allocation An easy, objective way to prorate joint cost at the split-off point is to use physical measure allocation or proration using a common physical characteristic of the joint products, such as: • tons of meat, bone, and hide in the meat packing or turkey processing industry, • pounds of milk in the dairy industry, • linear board feet in the lumber milling industry, • barrels of oil in the petroleum refining industry, or • number of computer chips in the semiconductor industry Physical measures provide an unchanging yardstick of output Assuming that it is agreed that the word ton means “short ton” or 2,000 pounds (rather than a “long ton” or a “metric ton”), a ton of output produced from a process 10 years ago is the same measurement as a ton produced from that process today Physical measures are useful Chapter 11 Allocation of Joint Costs and Accounting for By-Product/Scrap 483 Exhibit 11–5 Joint Cost Information for Harkins Poultry Joint processing cost for period: $5,400,000 (1) (2) Tons Produced (3) Sales Price per Ton at Split-Off (4) Marketing Cost per Ton Regardless of When Sold (5) Separate Cost per Ton If Processed Further (6) Final Sales Price per Ton Joint Product Breast 3,800 $2,800 $200 $100 $3,200 Ground 2,400 1,800 100 100 2,100 Whole 2,800 1,200 50 60 1,500 Diagram of problem assuming products are sold at split-off Joint Processing at a cost of $5,400,000 for 10,000 tons of output Marketing Costs Sales Price Breast 3,800 tons $200 per ton Breast $2,800 per ton Ground 2,400 tons $100 per ton Ground $1,800 per ton Whole 2,800 tons $50 per ton Whole $1,200 per ton By-Product 1,000 tons Split-off point in allocating joint cost to products that have highly variable selling prices These measures are also necessary in rate-regulated industries that use cost to determine selling prices For example, assume that a rate-regulated company has the right to set the selling price of its product at 20 percent above cost It would be circular logic to allocate joint cost using selling prices that were set based on the cost to produce the output Allocating joint cost based on a physical measure, however, ignores the revenuegenerating ability of individual joint products Products that weigh the most or that are produced in the largest quantity will receive the highest proportion of joint cost allocation—regardless of their ability to bear that cost when they are sold Using the physical measure allocation, Harkins Poultry’s $5,400,000 of joint cost is assigned as shown in Exhibit 11–6 (p 484) This allocation process treats each weight unit of output as equally desirable and assigns each the same per-unit cost For Harkins Poultry, physical measure allocation assigns a cost of approximately $600 ($5,400,000 Ϭ 9,000 tons) per ton of turkey, regardless of type However, the computations in Exhibit 11–6 show that, by allocating the same amount of joint cost to each ton of joint product, whole turkeys generate the lowest gross profit per ton of the three joint products 484 Chapter 11 Allocation of Joint Costs and Accounting for By-Product/Scrap Exhibit 11–6 Harkins Poultry’s Joint Cost Allocation Based on Physical Measure Cost per Physical Measure ϭ Total Joint Cost Ϭ Total Units of Physical Measurement ϭ $5,400,000 Ϭ 9,000 tons ϭ $600 per ton Joint Tons Cost Total Revenue Cost Gross Profit Product Produced per Ton Allocated Cost at Split-Off at Split-Off at Split-Off Breast 3,800 $600 $2,280,000 $2,800 $600 $2,200 Ground 2,400 600 1,440,000 1,800 600 1,200 Whole 2,800 600 1,680,000 1,200 600 600 Total 9,000 $5,400,000 The journal entries for incurring the joint processing cost, allocating it to the joint products, and recognizing the separate processing cost (assuming that all joint products are processed further) follow Work in Process Inventory—Turkey Processing 5,400,000 Various accounts 5,400,000 To record joint processing cost Work in Process Inventory—Breast 2,280,000 Work in Process Inventory—Ground 1,440,000 Work in Process Inventory—Whole 1,680,000 Work in Process Inventory—Turkey Processing 5,400,000 To allocate joint processing cost Work in Process Inventory—Breast (3,800 tons ϫ $100) 380,000 Work in Process Inventory—Ground (2,400 tons ϫ $100) 240,000 Work in Process Inventory—Whole (2,800 tons ϫ $60) 168,000 Various accounts 788,000 To record separate processing costs Marketing costs are not recorded until the product is sold Monetary Measure Allocation The primary benefit of monetary over physical measure allocations is that the former recognizes the relative revenue generation of each product.4 A problem with monetary measure allocations is that the basis used is dynamic Because of fluctuations in general and specific price levels, a dollar of output today is different from a dollar of output from the same process five years ago However, accountants customarily ignore price-level fluctuations when recording or processing data, so this particular flaw of monetary measures is manageable All allocation methods employ a proration process Because the physical measure allocation process is so simplistic, a detailed proration scheme is unnecessary However, more complex monetary measure allocations use the following steps to prorate joint cost to joint products: Choose a monetary allocation base List each joint product’s base values Monetary measures are more reflective of the primary reason a joint process is undertaken: profit Physical measure allocations are sometimes of dubious value because they are based on the flawed assumption that all physical units are equally desirable Glossary relevant range the specified range of activity over which a variable cost per unit remains constant or a fixed cost remains fixed in total; is generally assumed to be the normal operating range of the organization sales price variance a revenue variance that indicates the financial difference between the actual and budgeted sales prices for the actual number of units sold 879 simplex method an iterative (sequential) algorithm used to solve multivariable, multiconstraint linear programming problems six sigma method a high-performance, data-driven approach to analyzing and solving the root causes of business problems responsibility the obligation to accomplish a task or achieve an objective sales value at split-off allocation a method of assigning joint cost to joint products that uses the relative sales values of the products at the split-off point as the proration basis; use of this method requires that all joint products are salable at the split-off point responsibility accounting system an accounting system for successively higherlevel managers about the performance of segments or subunits under the control of each specific manager sales volume variance a revenue variance that indicates the difference caused by actually selling more or fewer units than budgeted multiplied by the budgeted sales price special order decision a situation in which management must determine a sales price to charge for manufacturing or service jobs outside the company’s normal production/ service market responsibility center a cost object or area under the control of a manager scarce resource a resource that is essential to production activity, but is available only in some limited quantity split-off point the point at which the outputs of a joint process are first identifiable or can be separated as individual products scrap an incidental output of a joint process; is salable but the sales value from scrap is not enough for management to justify undertaking the joint process; is viewed as having a lower sales value than a byproduct; has a minimal but distinguishable disposal value spoilage a unit that has been rejected at inspection for failure to meet appropriate quality standards or designated product specifications and that cannot be reworked and sold residual income (RI) the profit earned by a responsibility center that exceeds an amount “charged” for funds committed to that center responsibility report a report that reflects the revenues and/or costs under the control of a particular unit manager results benchmarking a comparative technique in which an end product or service is examined; the focus is on product/service specifications and performance results return of capital the recovery of the original investment (or principal) in a project return on capital income; is equal to the rate of return multiplied by the amount of the investment return on investment (ROI) a ratio that relates income generated by an investment center to the resources (or asset base) used to produce that income revenue center a responsibility center for which the manager is accountable only for the generation of revenues and has no control over setting selling prices, or budgeting or incurring costs risk uncertainty; reflects the possibility of differences between the expected and actual future returns from an investment risk-adjusted discount rate method a formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash flows to compensate for increased risk Robinson-Patman Act a law that prohibits companies from pricing the same products at different amounts when those amounts not reflect related cost differences rolling budget see continuous budget screening decision the first decision made in evaluating capital projects; indicates whether a project is desirable based on some previously established minimum criterion or criteria (see also preference decision) segment margin the excess of revenues over direct variable expenses and avoidable fixed expenses for a particular segment sensitivity analysis a process of determining the amount of change that must occur in a variable before a different decision would be made separate cost a cost that follows incurrence of joint cost and that is related to a specific product or group of products; is assigned only to that product or group of products service company a firm engaged in a high or moderate degree of conversion that results in service output service cycle efficiency a ratio resulting from dividing total actual value-added service time by total cycle time; reflects the proportion of total time that is value-added service department an organizational unit that provides one or more specific functional tasks for other internal units routing document see operations flow document shrinkage a decrease in units arising from an inherent characteristic of the production process; includes decreases caused by evaporation, leakage, and oxidation S safety stock a buffer level of inventory kept on hand by a company in the event of fluctuating usage or unusual delays in lead time simple interest a method of determining interest in which interest is earned only on the original investment (or principal) amount sales mix the relative combination of quantities of sales of the various products that make up the total sales of a company simple regression a statistical technique that uses only one independent variable to predict a dependent variable slack variable a variable used in a linear programming problem that represents the unused amount of a resource at any level of operation; is associated with less-than-orequal-to constraints staff personnel any employee responsible for providing advice, guidance, and service to line personnel; may be management standard a model or budget against which actual results are compared and evaluated; a benchmark or norm used for planning and control purposes standard cost card a document that summarizes the direct material, direct labor, and overhead standard quantities and prices needed to complete one unit of product standard cost system a valuation method that uses predetermined norms for direct material, direct labor, and overhead to assign costs to the various inventory accounts and Cost of Goods Sold standard quantity the standard quantity of input (in hours or some other cost driver measurement) required for the output actually achieved for the period Statement on Management Accounting (SMA) a cost or management accounting pronouncement developed and issued by the Institute of Management Accountants; application of these statements is voluntary statistical process control (SPC) the use of control techniques that are based on the theory that a process has natural variations in it over time, but uncommon variations are typically the points at which the process produces “errors,” which can be defective goods or poor service step cost a cost that increases in distinct amounts because of increased activity step method a process of support department cost allocation that assigns support department costs to cost objects after considering the interrelationships of the support departments and revenue-producing departments 880 stockout the condition of not having inventory available upon need or request strategic alliance an agreement between two or more firms with complementary core competencies to jointly contribute to the supply chain strategic benchmarking a comparative technique that is non–industry specific and focuses on how companies compete, seeking to identify the winning strategies that have enabled high-performing companies to be successful in their marketplaces strategic planning the process of developing a statement of long-range (5–10 years) goals for the organization and defining the strategies and policies that will help the organization achieve those goals strategy the link between an organization’s goals and objectives and the activities actually conducted by the organization strict FIFO method (of process costing) the method of cost assignment that uses FIFO to compute a cost per equivalent unit and, in transferring units from a department, keeps the cost of the beginning inventory units separate from the cost of the units started and completed during the current period suboptimization a situation in which an individual manager pursues goals and objectives that are in his/her own and his/ her segment’s particular interests rather than in the company’s best interests sunk cost a cost incurred in the past and not relevant to any future courses of action; the historical or past cost associated with the acquisition of an asset or a resource supply-chain management the cooperative strategic planning, controlling, and problem solving by a company and its vendors and customers to conduct efficient and effective transfers of goods and services within the supply chain support department the collective term for service and administrative departments surplus variable a variable used in a linear programming problem that represents overachievement of a minimum requirement; is associated with greater-than-orequal-to constraints T tactical planning the process of determining the specific means or objectives by which the strategic plans of the organization will be achieved; is short range in nature (usually 1–18 months) target costing a method of determining what the cost of a product should be based on the product’s estimated selling price less the desired profit tax benefit (of depreciation) the amount of depreciation deductible for tax purposes Glossary multiplied by the tax rate; the reduction in taxes caused by the deductibility of depreciation tax deferral a tax treatment in which income is subject to tax in a future period tax exemption a tax treatment in which income is never subject to income taxation tax shield (of depreciation) the amount of depreciation deductible for tax purposes; the amount of revenue shielded from taxes because of the depreciation deduction theoretical capacity the estimated maximum production or service volume that a firm could achieve during a period theory of constraints (TOC) a method of analyzing the bottlenecks (constraints) that keep a system from achieving higher performance; states that production cannot take place at a rate faster than the slowest machine or person in the process throughput the total output of a plant that is completed and sold during a period time line a representation of the amounts and timing of all cash inflows and outflows; is used in analyzing cash flow from a capital project total contribution margin see contribution margin total cost to account for the sum of the costs in beginning inventory and the costs of the current period total overhead variance the difference between total actual overhead and total applied overhead; is the amount of underapplied or overapplied overhead total quality management (TQM) a structural system for creating organization-wide participation in planning and implementing a continuous improvement process that exceeds the expectations of the customer/ client; the application of quality principles to all company endeavors; is also known as total quality control total units to account for the sum of the beginning inventory units and units started during the current period U uncertainty the doubt or lack of precision in specifying future outcomes underapplied overhead a debit balance in the Overhead Control account at the end of a period; exists when the applied overhead amount is less than the actual overhead incurred unexpired cost an asset unit-level cost a cost caused by the production or acquisition of a single unit of product or the delivery of a single unit of service units started and completed the difference between the number of units completed for the period and the units in beginning inventory; can also be computed as the number of units started during the period minus the units in ending inventory upstream cost a cost related to research, development, or product design usage the quantity of inventory used or sold each time interval V value the characteristic of meeting the highest number of customer needs at the lowest possible price value-added (VA) activity an activity that increases the worth of the product or service to the customer value chain the set of processes that converts inputs into products and services for the firm’s customers; includes the processes of suppliers as well as internal processes value chart a visual representation indicating the value-added and non-value-added activities and time spent in those activities from the beginning to the end of a process value engineering a disciplined search for various feasible combinations of resources and methods that will increase product functionality and reduce costs total variance the difference between total actual cost incurred and total standard cost for the output produced during the period values statement a statement reflecting an organization’s culture by identifying fundamental beliefs about what is important to that organization transfer price an internal charge established for the exchange of goods or services between organizational units of the same company variable cost a cost that varies in total in direct proportion to changes in activity; is constant on a per-unit basis transfer time the time consumed by moving products or components from one place to another two-bin system an inventory ordering system in which two containers (or stacks) of raw materials or parts are available for use; when one container is depleted, the removal of materials from the second container begins and a purchase order is placed to refill the first container variable costing a cost accumulation and reporting method that includes only variable production costs (direct material, direct labor, and variable overhead) as inventoriable or product costs; treats fixed overhead as a period cost; is not acceptable for external reporting and tax reporting variable cost ratio (VC%) the proportion of each revenue dollar represented by variable costs; computed as variable costs divided by sales or as (1 Ϫ contribution margin ratio) Glossary variable overhead efficiency variance the difference between budgeted variable overhead based on actual input activity and variable overhead applied to production variable overhead spending variance the difference between total actual variable overhead and the budgeted amount of variable overhead based on actual input activity variance a difference between an actual and a standard or budgeted cost; is favorable if actual is less than standard and is unfavorable if actual is greater than standard variance analysis the process of categorizing the nature (favorable or unfavorable) of the differences between standard and actual costs and determining the reasons for those differences vertex a corner produced by the intersection of lines on a graph 881 virtual reality an artificial, computergenerated environment in which the user has the impression of being part of that environment and has the ability to navigate and manipulate objects (such as products) behaving like real-world objects cost per equivalent unit of production for all units completed during the current period; combines beginning inventory units and costs with current production and costs, respectively, to compute the average volume variance a fixed overhead variance that represents the difference between budgeted fixed overhead and fixed overhead applied to production of the period; is also referred to as the noncontrollable variance working capital the amount remaining after total current liabilities are subtracted from total current assets; measures the amount of an organization’s liquid assets; may also be referred to as “net working capital” W work in process the stage in the production or conversion process where work has been started but not yet completed waste a residual output of a production process that has no sales value and that must be disposed of weighted average (WA) method (of process costing) the method of cost assignment that computes an average Y yield the quantity of output that results from a specified input Name Index Note: Page numbers followed by “n” refer to footnotes A Abdallah, Wagdy M., 570 Albers, David, 128n Alexander, Marc, 153 Ambler, Tim, 543 Andu, Ritsuko, 838n Antari, Sam, 306 Anthony, Robert N., 518n, 519 Applegate, Jane, 795n B Barkowski, Lawrence, 167 Barnes, Brenda, 726 Bass, Dina, 751n Bateman, Thomas S., 525n Beattie, Pam, 54 Benke, Ralph L., 566n Berliner, Callie, 536n, 537 Berwick, Donald, 733 Blanchard, Cherie, 748n Böer, Germain, 853n, 854 Borthick, A Faye, 151 Boudreaux, Paul, 178 Bowe, Christopher, 779 Bradley, Joann, 178 Brannen, Laurie, 349 Brent, Paul, 429n Briggs, Alice, 725 Brimson, James A., 536n, 537 Brown, Alan, 702n Brown, Gary, 848 Brown, Herbert E., 152 Brown, Sarah, 662 Butler, Janet B., 619n C Caffrey, Diana, 101 Cairncross, Frances, 853n Calley, Tonya, 544 Cane, Alan, 536n Carey, John, 698n Challenger, John A., 863 Cheatham, Carole, 614n Cheng, Susan, 542 Chow, Chee W., 619n Christensen, Bob, 643 Clark, Steve, 750n Cole, Clare, 159 Colmenares, Leopoldo, 843n Comm, Clare, 748n Compton, Ted R., 732 Conỗalves, Paulo, 528n Conroe, Maria, 194 Constantinides, Sylvia, 845 882 Cooper, Robin, 119n, 128n, 517n, 520, 526n, 566n, 850n Cosgrove, Janet, 461 Cox, Jeff, 809n Coyle, Wayne, 638 Crail, Mark, 750n Craycraft, Cathy, 389n Crosby, Philip, 757, 757n Cummings, John, 349 Curran, Rob, 545 Curtin, Margaret, 853n, 854 D Dalton, Julie Carrick, 851n Dalton, Lacy, 102 Davis, Bob, 625n Davis, Theresa, 594 Davis, Tim, 848, 848n Delbert, Diane, 833 Deming, W Edwards, 754, 765 Dhir, Joe, 583 Dirope, Cynthia, 320 Ducey, Mike, 797n Dyer, Geoff, 779 E Edwards, James Don, 566n Egger, Ed, 733 Eliason, Jill, 688 Ellram, L M., 793 Engardio, Peter, 10n Erhun, Feryal, 528n Estrin, T L., 128n Etheridge, Jenna, 155 Evans, Bob, 644 F Favole, Jared, 779 Fehrenbacher, Katie, 701n Finkle, Jim, 838n Foster, Shelly, 689 Frank, Robert, 625n Friedman, Milton, 23 G Ganer, Pamela, 622n Ganulin, Denise, 619n Gardner, Sid, 702n Garvin, David, 744 Gatti, James F., 476n Gibbons, Brenda, 463 Giles, Joe, 823 Godfrey, James T., 760 Goldratt, Eliyahu, 809n Gomes, Lee, 830 Govindarajan, Vijay, 518n, 519 Graham, J R., 647 Greenhouse, Steven, 195 Greer, John, 640 Grinnell, D Jacque, 476n Gross, Larry, 863 Guidry, Flora, 389n Guillon, Sharon, 689 H Haas, Jill, 642 Hackl, John, 748n Haddad, Kamal, 619n Hadley, Scott W., 786n Hall, Gene, 838n Hansen, Fay, 349 Haoki, Anulu, 314 Harvey, C R., 647 Hassa, Nabil, 152 Henderson, Sandra Cherie, 619n Hendricks, Kevin B., 754n Hogaboam, Liliya S., 652 Hopman, Jay, 528n Horrigan, James O., 389n Howe, Molly, 648 Hoyt, Louis, 853n, 854 Hunt, Stephen, 348n Huss, Jerry S., 378 I Irby, Miriam, 360 J Jack, Andrew, 779 Jehle, Kathryn, 697 Jensen, Sam, 647 Jilg, Lois, 725 Johnson, Laura, 864, 865 Johnstown, Jill, 426 Jones, Brad, 368 Jones, Jenny, 674 Jones, Jim, 457 Jones, Joe, 674 Jordan, Cara, 372 Juran, Joseph, 129n, 741 Jusko, Jill, 128n K Kantor, Jeffrey, 128n Kaplan, Robert S., 14, 617n Kaslowski, Lana, 638 Keeton, Ann, 720n Keller, Carl E., Jr., 853n Name Index Kennedy, Vic, 49 Kettering, Ronald C., 615 Klammer, Candice, 688 Klatz, Soloman, 669 Klein, Paula, 348n Koontz, Pat, 250 Koss, Michael, 829 Kroll, Karen M., 550n Kruger, Daniel, 264n Krumwiede, Kip R., 802n Kumar, Ashok, 129n L Lang, Pete, 152 Larsen, Doug, 645 Lawson, Kendra, 544 LeBlanc, Gigi, 202 Lemak, David, 751n Leyh, Ellen, 590 Linden, Lars, 594 Lipscomb, Bernie, 155 Litcomb, Wayne, 578 Liu, Lucy, 732 Lloyd, Mary Ellen, 833 Lockwood, Nancy R., 841 Logan, Willie, 739 Louise, Tina, 107 Lustgarten, Abrahm, 853n Lutrell, Bethany, 500 M Mahoney, James, 160 Malanga, Joe, 439 Malhotra, Yogesh, 838 Marshall, Alfred, 609n Martin, John, 701n Martin, Jose, 735 Mathaisel, Dennis, 748n Mayberry, Mike, 691 McCafferty, Joseph, 514, 544 McCartney, Scott, 837n McGhee, Mitch, 572n Mendez, Francis, 580 Mero, Neal, 751n Moore, Dayna, 861 Moore, George, 372 Morgan, J P., 625 Moriarity, Michael, 156 Morris, Cindy, 49 Morris, Rose, 587 Muddle, Paul, 748n Mui, Ylan Q., 837n Mundy, Alicia, 779 N Nabors, Edward, 201 Nakamoto, Michiyo, 746n Nardelli, Bob, 860 Narisetti, Raju, 543 Natore, Rocky, 774 Nelson, Bob, 750n Newport, Jason, 378 Norton, David P., 14, 617n O Obenchain, William, 774 O’Connell, Betsy, 156 Oehlke, Mary Sue, 596 Orange, Erica, 846n Orman, Suze, 687 P Paladino, Robert E., 618 Palate, Tanzi, 309 Pareto, Vilfredo, 129n Pasewark, William R., 760 Payne, Geoff, 57 Peach, Sam, 648 Perkins, Jo, 49 Peterson, Pete, 774 Pillar, Frank, 129n Plaskoff, Matt, 852n Poole, Janet, 464 Power, Sue, 193 R Raiborn, Cecily, 619n Rajgopal, S., 647 Rankin, Toni, 58 Razer, Rachelle, 827 Rechtin, Mark, 793n Reed, John, 746n Reed, Richard, 751n Reed, Tom, 596 Reeves, Ron, 745 Reichheld, Frederick, 863 Richman, Tom, 763n Rigera, Amir, 586 Riley, Rita, 691 Robinson, Michael A., 160 Roper, Caroline, 736 Rosen, Corey, 851 Rosenthal, Jim, 838n Roth, Harold P., 151, 155, 853n Rubin, Hannele, 861 Ryan, Faye, 593 S Sacks, Erin, 505 Sahling, Leonard, 129n Sanches, Ludmilla, 461 Sanchez, Imelda, 640 Saunders, Paul M., 152 Schneider, Linda, 745 Sharp, Kevin, 150 Sheridan, John H., 801n Shook, Steven R., 652 Shulman, Bret, 736 Sims, Linda T., 155 Singhal, Vinod R., 754n 883 Slagmulder, Regine, 517n, 520 Smith, Jenna, 684 Snell, Scott A., 525n Snider, Tom, 108 Sopariwala, Parvez, 748n South, Jeannie, 636 Spathis, Charalambos, 845 Stendardi, Edward J., 848n Stocks, Kevin D., 802n Strauss, Marie, 594 Swain, Monte R 802n Sweet, Denise, 306 T Tate, Mervin, 463 Taub, Kessla, 588 Thomas, Paulette, 829 Thompson, Joey, 864 Thompson, Laura, 545 Tobias, Stan, 178 Tompkin, Steve, 49 Trachtenberg, Jeffrey, 8n Travers, Terry, 643 Troy, Mike, 699n Tschohl, John, 800n Turner, Susan, 545 Tyler, Joe, 544–545 Tyner, Ted, 419 Tyson, Thomas, 848n V Van Schaik, Marcel, 774 Vatter, William J., 122n Vernyi, Bruce, 128n Victoria, Graca, 275 Vinas, Tonya, 128n W Wade, Judy, 838n Walker, Marcus, 861 Weatherby, Mons, 416 Weiss, Tom, 545 Wenskel, Steve, 320 Westin, Farrah, 139 Whalen, Henry, 505 White, LaNora, 457 White, Letitia, 159 White, Paddy, 843n Whiting, Rick, 348n Williamson, Jim, 619n Wingfield, Nick, 466 Winslow, Ron, 779 Wipple, George, 545 Wittier, Jeff, 463 Wong, Doug, 673 Wood, Bill, 459 Woods, Michael D., 126 Wright, Benjamin, 428n Wright, Laura, 720 Subject Index Note: Page numbers followed by “n” refer to footnotes A ABC, determining usefulness of business environment, changes in, 130–131 current cost allocations, irrationality of, 130 factors to consider, 128 high product/process complexity, 129–130 overhead costs, lack of commonality in, 130 product variety, 129 Ability-to-bear criterion, 557 Abnormal loss job order costing, 179 process costing, 233, 234–235 Abnormal spoilage, 181 Absorption cost, 36n Absorption costing cost behavior, 83–84 defined, 81 illustrations, 84–86 variable costing, comparison to, 86–87 variable costing, differences between, 82–83 Accounting “dialects,” 2–4, 2n Accounting rate of return (ARR), 669, 674–675, 674n Accounts payable, 339–341 Accounts receivable (A/R), 338–339 Activity, 114 Activity analysis, 114 Activity-based costing (ABC) activity center cost pools, 125 activity driver, 125 components of, 124 cost drivers, 125, 126 criticisms of, 131–132 defined, 124 illustrated, 127–128 introduction, 114 JIT system, 804n two-step allocation, 125–126 usefulness of, determining (See ABC, determining usefulness of ) Activity-based management (ABM) business-value-added activities, 115 introduction, 114 manufacturing cycle efficiency (MCE), 117–118 non-value-added (NVA) activity, 114 value-added (VA) activity, 114 value-added versus non-value-added activities, 114–117 Activity center cost pools, 125 Activity driver, 125 “Acts of nature,” 720 Actual costing systems, 164–165, 165n Actual cost system, 38 Actual fixed overhead (FOH), 70 Actual input quantity (AQ), 269 884 Actual price (AP), 269 Ad hoc discounts, 441 Administrative departments, 556 Advance pricing agreements (APAs), 572 After-tax cash flows, effect of depreciation on, 660–662 “Age of change,” 836 “Aggressive” accounting, Algebraic method, 559, 562–565 Algorithm, 449 Allocation bases, 556–558 “Allowable” product cost, 791–792 Altering of Worker Time Cards Spurs Growing Number of Suits (Greenhouse), 195 Amazon.com, American Productivity and Quality Center, 348, 745n American Society for Quality Control (ASQC), 741 Amoco (Texas City, Texas), 749–750 Annuity, 654 Annuity, present value of, 674 Annuity due, 674 Anti-Bribery Convention (1999), 15 Apple, 528, 854 Applied overhead, 69 Appraisal costs, 37, 754 Appropriation, 704 Approximated net realizable value at split-off allocation, 486 Archstone Consulting, 13 Asset turnover, 606 Aston Martin, 177–178, 178n AT&T, 525 Athens Supplements Co (ASC), 559 “Attitude of indifference,” 750 Authority, 10 Autonomation, 801 B B2B (business-to-business), 541, 801–802 Backflush costing, 805–807 “Bad will,” 529 “Bag” assumption, 396, 396n Baker Hughes Inc., 15 Balanced scorecard (BSC) customer value perspective, 13 financial performance perspective, 13 internal business perspective, 13 lag indicators, 12 lead indicators, 12 learning and growth perspective, 12–13 measuring performance, 617–619 objectives of, 12 overview, 12–13 perspectives and, 13–14 quality, obtaining information using, 761–763 simplistic, 13 TQM and, 761–763 Balance sheet, 30 budgeted financial statements, 343 defined, 30 Baldrige Award, 750–754 Banking relationships, 713–714 Bar coding, 39, 522, 615 BASF Corporation, 797 “Basket” assumption, 396, 396n Batch-level costs, 120–121 Benchmarking code of conduct, 745n cost reduction, 701 defined, 745–746 internal, 746 introduction, 745–746 process benchmarking, 747–748 reasons for, 746 results, 746 salary information, 623n steps in, 748 strategic benchmarking, 748 types of, 746–747 Benchmarks, 177, 228, 600, 603–604, 615 Benefits-provided ranking, 558–559 Bic pens, Bidding, 284 Bill of materials, 265 Blackberry, 528 Black box, 519 “Blow the whistle,” Bond ratings, 711 Borders Group Inc., Bottlenecks, 809 See also Theory of constraints (TOC) Breakeven formula approach to, 384–385 graphing approach to, 385–387 Break-even chart, 385 Break-even point (BEP), 382 Break-even point (BEP), identifying income statement approach, 388 profit-volume (PV) graph, 387–388 revenue and cost assumptions summary, 382–383 Bribes, 14–15 Britain’s Chessington World of Adventures, 750 British Standards Institution, 765 Budget, 324 Budgeted financial statements balance sheet, 343 budgeted balance sheet, 345 cost of goods manufactured schedule, 342–343 Subject Index income statement, 343, 344 introduction, 341–342 statement of cash flows (SCF), 343–347 Budgeting process, 324–327 defined, 324 external variables, 324, 325 internal variables, 324, 325 planning processes, relationships among, 326 strategic planning, 324–325 tactical planning, 325 Budget manual, 349–350 Budget slack, 348–349 Budget variance, 278 “Build” mission, 532, 535 Burden, 37n Business environment, changes in, 130–131 Business process reengineering (BPR), 837–838 Business-to-business (B2B) relationships, 541, 801–802 Business-value-added activities, 115, 115n By-product, 476 By-product and scrap, accounting for net realizable value approach, 489, 489n other income approach, 490–492 realized value approach, 490–492 sales value of the by-product, recording method, 488–489, 489n use of terms, 488 By-product and scrap, in job order costing, 492, 492n C “Call for action,” 490–492 Capacity, measures of, 74 Capital asset acquisition, 651, 652 Capital assets, 651 Capital budgeting accounting rate of return (ARR), 674–675 after-tax cash flows, effect of depreciation on, 660–662 capital asset acquisition, 651, 652 capital project evaluation, compensating for risk in, 668–672 cash flows, use of, 651–653 cash flows illustrated, 653 future cash flows, discounting, 655–658 internal rate of return (IRR), 658–660 introduction, 651 investment decision, 665–668 methods, assumptions and limitations of, 662–664 multiple capital projects, ranking, 668 net present value (NPV), 656 net present value method, 656–657 payback period, 654–655 postinvestment audit, 672 profitability index (PI), 657–658 time lines, 653–654 time value of money, 673–674 Capital project evaluation, compensating for risk in introduction, 668–669 judgmental method, 669 risk-adjusted discount rate method, 669–670 sensitivity analysis, 670–672 “Carbon offsets,” 853 “Carrots,” 532 Cash, sources of, 711–713 Cash budget accounts payable, 339–341 accounts receivable (A/R), 338–339 cash disbursements, 339–341 cash receipts, 336–338 introduction, 335–336 model, 336 ten ways to improve small business cash flow, 342 Cash collection cycle, 711–712 Cash disbursements, 339–341, 652 Cash flows in capital budgeting, 651–653 defined, 652 statement of, 605 Cash flows, illustrated introduction, 653 time lines, 653–654 Cash management banking relationships, 713–714 cash, cost of carrying, 713 cash, optimal level of, 711 cash, sources of, 711–713 introduction, 710–711 Cash receipts, 336–338, 652 Centralization, 549 Central processing unit (CPU), 758 Certified Management Accountant (CMA), Certified Public Accountant (CPA), “Certify” suppliers, 797 “Change nothing” option, 426 Chief executive officers (CEOs), Chief financial officers (CFOs), Circuit City, 837 Cisco, 701 CMS, designing competitive environment, 527–528 core competencies, 526 cost accumulation, 761 cost structure, 526–527 design of, 524 generic missions, 524–525 organizational culture, 525–526 organizational form, 523–526 organizational structure, 525 organization mission, 525 process measurement activities, 761 research and development (R&D) costs, 761 strategies, 528–530 Coding, 758 Coding (transactions), 758 Coefficient of determination, 717 Collaboration, 715, 802 Committed costs, 702 Committed fixed costs, 702–703 Common expenses, 442, 443n Compensation, ethical considerations of, 625–626 Compensation elements, tax implications of, 624–625 Compensation strategy, 620, 621 Competence, Compounding period, 673 Compound interest, 673 Computer Aided Manufacturing-International Inc (CAM-I), 536 Computer-integrated manufacturing (CIM), 808 Concrete Café, 178 Confidentiality, 885 Constraint, 445, 809 Consumer Price Index (CPI), 698 Continuous budget, 347–348 Continuous improvement concepts, 131 Continuous loss, 233 Contribution income statement, 83 Contribution margin (CM), 83, 383, 383n Contribution margin ratio (CM%), 384–385, 396, 398 Contribution margin ratio formula, derivation of, 385n Control charts, 743 Controllable variance, 278 Controllers, 10 Conversion cost defined, 30–31 standard costing, as an element in, 288–290 Conversion process business input/output relationships, 33–34 finished goods, 32 firms, degrees of conversion in, 31–32 inputs, 31 inventory accounts, 33 manufacturers versus service companies, 33–35 outputs, 31 period costs, 31 product costs, 31 production center, 34 raw material, 32 retailers versus manufacturers/service companies, 32–33 work in process, 32 Core competency, 8–9 Corporate “profit” (or savings), 567 Corporations, 14–15, 523, 661, 661n Cost, 25 Cost accounting, 4–5 Cost accounting standards, Cost Accounting Standards Board (CASB), Cost accumulation systems, 163–164 Costa Del Mar (energy credits), 853 Cost allocation, 38, 130 Cost avoidance, 697, 701–702 Cost-based transfer prices, 567–568, 567n Cost behavior, 83–84 Cost center, 554–555, 555n Cost changes because of inflation/deflation, 698 because of quantity purchased, 700 because of supply/supplier adjustments, 699 because of volume changes, 698 introduction, 698 Cost classification categories, 25 Cost consciousness, 697 Cost containment, 697, 700, 709, 710 Cost control systems, 696–697, 701–702 Cost driver, 29–30 Cost driver analysis batch-level costs, 120 cost drivers, 118–119 cost level allocations illustrated, 122–124 cost pools, 119 defined, 120 levels at which costs are incurred, 119–122 organizational-level costs, 121, 122 product-level (process-level) cost, 121 unit-level costs, 120 886 Cost drivers classification of, 118 identifying, 118, 119 two-step allocation, 125, 126 Cost leadership, Cost management system (CMS), 760 balanced scorecard (BSC), 761–763 conceptual design principles, 536–537 defined, 25 defining, 519–521 designing (See CMS, designing) dual focus of, 520 enterprise resource planning (ERP) systems, 536 gap analysis, 535–536 integrated, 521 introduction, 517 management control system (MCS), 518–519 management information system (MIS), 517–518 organizational role of, 520 production process, 761 quality, obtaining information using, 761–763 roles of, 521–523 Cost management system (CMS), components of CMS elements, 530 informational elements, 532–534 managerial contracting process, 531 motivational elements, 530–532 reporting elements, 534–535 Cost object, 26 Cost of capital (COC), 655, 671 Cost of compliance, 755, 756 Cost of goods manufactured (CGM), 41, 42 Cost of Goods Sold (CGS), 39, 171 underapplied and overapplied overhead, effects of, 71–72, 72n Cost of noncompliance, 755, 756 Cost of production report, 222 Cost of quality, 615 Cost-plus contract, 165 Cost pools, 119 Cost reduction ABC and, 128 budgeting financial statements and, 341–342 cost consciousness, 697 intent of, 701 JIT and, 807 SCF and, 605 technological advances, interaction between, 699 VE and, 792 Costs batch-level, 120–121 levels of, 120 organizational-level, 121, 122 product-level (process-level), 121 unit-level, 120 Cost structure, 526–527 Cost tables, 792 Cost terminology actual cost system, 38 appraisal costs, 37 balance sheet, 30 conversion cost, 30–31 conversion process, 31–35 cost allocation, 38 cost classification categories, 25 cost driver, 29–30 Subject Index cost management system, 25 cost object, 26 cost of goods manufactured (CGM), 41, 42 direct costs, 26 direct labor, 30, 36–37 direct material, 30, 36 distribution cost, 31 expenses, 30 failure costs, 37 financial statements, 30–31 finished goods, 32 Finished Goods Inventory account, 34 fixed cost, 27–28 fixed overhead costs, 37 income statement, 30 indirect costs, 26 indirect costs (overhead), 26, 30 inputs, 31 intangible output, 32 inventoriable costs, 30 inventory accounts, 33 losses, 30 manufacturer, 32 mixed cost, 28 normal cost system, 39 outputs, 31 overhead, 37–38 overhead (indirect costs), 30 period costs, 30 predetermined overhead rate (or overhead application rate), 39 predictor, 29, 30 prevention costs, 37 prime cost, 31 product costs, 30 production center, 34 quality costs, 37, 38 raw material, 32 relevant range, 26 service company, 32 step cost, 29 step fixed cost, 29 step variable cost, 29 tangible output, 32 total cost to account for, 42 trading costs, 28 variable cost, 26–27 variable overhead costs, 37 work in process, 32 Work in Process Inventory account, 34 “work not started” stage, 34 Cost understanding, 697, 715 Cost-volume-profit (CVP) analysis defined, 388 fixed amount of profit, after tax, 390–391 fixed amount of profit, before tax, 389–390 incremental analysis for short-run changes, 393–396 overview, 388–389 revenue and cost assumptions summary, 382–383 specific amount of profit per unit, after tax, 392–393 specific amount of profit per unit, before tax, 391–392 underlying assumptions of, 401–402 Credibility, Curvilinear relationships between variables, 75n Customer relationship management (CRM), 527 Customer value perspective, 13 CVP analysis, in multiproduct environment, 396–398 CVP relationships, managing risk of margin of safety (MS), 399 operating leverage, 399–401 Cycle (lead) time, 116 D D&O (directors’ and officers’) insurance, 720 Data mining, 845 Debt Collection Improvement Act of 1996, 698 Decentralization, 549–551 Decision variable, 445 Defects, 179 Degree of operating leverage (DOL), 400–401 Deming Prize Deming Application Prize, 754 Deming Prize for Individuals, 754 Quality Control Award for Operations, 754 Dependent variable, 75 Depreciation ABC, 131 after-tax cash flows, effect on, 660–662 capital budgeting, 335 divisional profits and, 605 fixed cost, as a, 27, 28 fixed costs, 702, 708 indirect, 26 overhead cost, 37 period costs, 31 product line decisions, 444 ROI computations and, 607 service-life method, 37 straight-line, 37, 694 tax benefits, 661 tax shield, 661 units-of-production method, 37 Diagnostic-related groups (DRGs), 310–311 Differential cost, 425 Differential revenue, 425 Direct costing (See Variable costing) Direct costs, 26 Direct labor, 30, 36–37 Direct labor hours (DLHs), 273–274 Direct material, 30, 36 Direct method, 558, 560–561 “Director of Taxation,” 660 Discounted cash flow techniques internal rate of return (IRR), 658–660 net present value method, 656–657 profitability index (PI), 657–658 Discounting, 655 Discount rate, 655 Discrete loss, 233–234 Discretionary costs, 555n benefits from, measuring, 705 budget, control using, 708–710 budgeting, 704 effectiveness, 706–707 efficiency, 706 engineered costs, control using, 707–708 introduction, 703–704 Disney, Distribution cost, 31 Diversity, 128, 550, 617 See also Workforce diversity Divisional profits, 604–605 “Do nothing” option, 426 Downsizing, 839–840 Subject Index Downstream costs, 3, Dual pricing arrangement, 569 Du Pont model, 606 E Earnings management, Economic order quantity (EOQ) economic production run (EPR), 811–812 EOQ formula, 811 introduction, 811 Economic production run (EPR), 811–812 Economic value added (EVA®), 609–610, 609n, 610–611 EDI (electronic data interchange), 710, 714, 802 EDS (outsourcing firm), 838 Effective, importance of defining, 600 Effectiveness, 706–707 Efficiency, 706 Efficiency variance, 278 Efficient, importance of defining, 600 EFQM Excellence Model, 766–767, 766n Electronic data interchange (EDI), 802 Employees, defined, 599n Employees, young, 621–622, 622n Employee stock ownership plan (ESOP), 624, 851 Employee suggestions, 800 Employee time sheets, 170–171 “End-of-pipe strategy,” 853 Engineered costs, 707 Engineering change orders (ECOs), 121, 792, 803 Enterprise resource planning (ERP) systems adopting, and perceived benefits from, 845 adopting, reasons for, 845 benefits from, 843–844 concept of, 844–845 data mining, 845 defined, 842–843 ERP information management, 843 financial function, impact on, 845–846 implementing, 843 internal supply chain and traditional information management, 842 introduction, 536 modules in, 844 personal computers (PCs), 842 reality mining, 846 Environmental constraint, 10–11 Environmental management systems, 852–854 Environmental Protection Agency (EPA), 698 E-procurement systems, 715 Equivalent units of production (EUP), 213–216, 216n, 220n, 331n Ernst & Young Global Transfer Pricing Survey 2007–2008, 572–573 Establishing standards appropriateness, 284 attainability, 285 Ethics multinational corporations, 14–15 professional, 5–7 European Foundation for Quality Management (EFQM), 766–767 European Quality Award, 766 Executive pay, 625, 625n Expatriates, 625 Expected capacity, 73, 73n Expected standards, 285 Expenses, 30 Expired cost, 25 External failure costs, 754 External performance measures, 601–602 F Failure costs, 37, 758 Fair Labor Standards Act, 171 False Claims Act, Feasible region, 448 Feasible solutions, 445 Feedback budgeting process, 327 performance evaluation, 604 performance plans and, 623 “Feeder” systems, 529 FIFO EUP calculation, 232 Financial accounting, 2–3, 761 Financial Accounting Standards Board (FASB), 2, 83 Financial budgets, 328–329 Financial performance perspective, 13 Financial statements, classification of, 30–31 Financing decision, 652 Finished goods, 32 Finished Goods (FG) Inventory, 39, 171, 213, 331–332 Finished Goods Inventory account, 34, 268 Finished Goods Inventory control account, 171 First-in, first-out (FIFO) method, 211, 216–218, 223–226, 225n, 235, 235n Fixed cost, 27–28, 383, 433, 440 Fixed Manufacturing Overhead Control, 275 Fixed overhead (FOH) rate, 274 Fixed overhead (FOH) variance, 275–277 Fixed overhead costs, 37 Fixed overhead spending variance, 276 “Flakes” of silicon, 522 Flexible budget, 78–79 Flexible manufacturing systems (FMSs), 807–808 Flextronics International Ltd., 751 Focused factory arrangements, 851 Ford Motor Company, 751 Foreign Corrupt Practices Act (FCPA), 14–15 For-profit businesses, 32 Forward contracts, 719–720 Full costing (See Absorption costing) Full production cost, 441–442 Functional classification, 81 Future value (FV), 673 G Gap analysis, 535–536 Generally accepted accounting principles (GAAP) ABC and, 131 cost management system (CMS), 517 distribution costs, 31 financial accounting compliance, normal capacity, 73 overhead costs, 38n product/period cost distinction, 122 General Mills, 748 General Motors, 11–12, 746, 808, 848 General partnerships, 523 General price-level changes, 698 Georgia Ports Authority and the Panama Canal Authority, agreement between, 846 Gillette, 435 887 Global compensation, 625 Global environment, 7–8 Goal congruence, 553 Goal programming, 445n “Good” service, 750 Governing board, 847 Grade, 745 Gross margin, 434n Gross profit, 434n Group incentives, 622 H Half-year (or mid-quarter) convention, 662n Hallmark, 129, 699 “Harvest” mission, 532 Hedging, 719–720 Heterogeneous output, 176 Hewlett-Packard, 117n Higashimaru Shoyu, 850 High-low method, 74–75 “High quality,” 765 “High quality” versus “high grade,” 745 Homogeneous output, 176 Honda, Hurdle rate, 659–660, 675 Hybrid costing systems, 231 I IBM, 10 IBM Global Business Services, 348 Ideal (theoretical) standards, 285–286 Idle time, 116 Imposed budgets, 348 Incentives CMS and, 530 compensation strategy, 620 cost control systems, 701 group, 622 lead time, 615–616 motivational element, as a, 532 nonfinancial, 624 open-book management, 851 pay-for-performance plans, 621, 622 relative to organizational level, 623 strategic alliances, 846 sub-unit managers, 535 Income statement, 30 budgeted financial statements, 343, 344 defined, 30 Incremental analysis defined, 394 examples, 394–396 Incremental cost, 425 Incremental revenue, 425 Independent projects, 667 Independent variables, 75, 75n Indirect costs, 26, 36 Indirect costs (overhead), 30 Industry Week, 125 Inefficient operations, loss from, 286 Inflation/deflation, 698 Information sharing, 802, 831, 839 Information technology (IT), 801–802 “Innovation portal,” 10 Input–output coefficients, 446 Inputs, 129 Insourcing, 429, 432 Inspection time, 116 888 Subject Index Institute of Management Accountants (IMA) ethical issues, guidance on, overview, Statement of Ethical Professional Practice, Insurance contracts, 720 Intangible output, 32 Integer programming, 445 Integrity, Intel, mission statement, 599, 599n Intellectual capital, 10 Interest, 673, 673n Internal benchmarking, 746 Internal business perspective, 13 Internal failure costs, 754 Internal performance measures, 600–601 Internal rate of return (IRR), 658–660 Internal Revenue Service (IRS), 83, 516, 572 International Accounting Standards Board (IASB), International Organization for Standardization (ISO), 765–766 Internet business model, 801 Interpolation, 659n Intranet, 166 Inventoriable costs, 30 Inventory buying, 787 carrying, 787 introduction, 786 producing, 787 production management philosophies and, 787–788, 789, 790 value chain, relationships in, 786–787 Inventory (use of term), 787 Inventory accounts, 33 Investment center, 556 Investment decision activity, worthiness of, 665 assets, identifying appropriate, 665–666 capital investment information, 666 capital project acceptability, judging, 666 defined, 652 independent projects, 667 mutually exclusive projects, 667 mutually inclusive project, 667 preference decision, 666 process, 666–668 screening decision, 666 Investment in project, 674 iPhone, 528 ISO 9000 series, 765 product and material losses (See Product and material losses (job order costing)) Raw Material Inventory, 169 stages of production, 167, 167n standard costing, 176–177 Job order costing system, 163, 164–167 Job order cost sheet, 167–169 Job time tickets, 170n Johnson Controls, 11 “Joint activities,” 493 Joint cost, 476 Joint cost, allocation of introduction, 482 monetary measure allocation, 484–488 physical measure allocation, 482–484 product pricing, 476n Joint costs in not-for-profit organizations, 493, 493n in services business, 493, 493n Joint process decision, the, 479–482 description of, 478–479 introduction, 476 model of, 480 output, illustration of, 478 outputs of, 476–478 Joint products, 476, 477–478 Judgmental method (of risk adjustment), 669 Just-in-time (JIT), 793–795 Just-in-time (JIT) environment, logistics of accounting implications of, 802–807, 803n, 804n flexible manufacturing systems (FMSs), 807–808 introduction, 801–802 lean enterprises, 808–809 Just-in-time (JIT) manufacturing, implementation of introduction, 795 plant layout, 799–801 product design, 797–798 product processing, 798–799 supplier relationships and distribution, 795–797 Just-in-time (JIT) manufacturing process efficiency, increasing, 118 ideal (theoretical) standards, 285–286 outsourcing, 433 Just-in-time (JIT) systems, 793–795 J K Japan Quality Medal, 754 “Jidoka,” 801 Job order costing Aston Martin, 178–179, 178n by-product and scrap in, 492, 492n completion of production, 171–172 Concrete Café, 178 documents and cast flows, 172 employee time sheets, 170–171, 170n illustration, 172–175 introduction, 163 job order cost sheet, 167–169 managers, assisting, 177–179 material requisitions, 169–170 overhead, 171 Paul’s Pirogues, 178–179 Kaizen costing, 792–793 Kyoto Protocol, 852–853 L Labor efficiency variance (LEV), 273 Labor mix variance, 293–294 Labor rate variance (LRV), 273, 293–294 Labor variances, 273 Labor yield variance, 293–294 Lack of high quality, 754 Lagging indicators, 611, 612 Lag indicators, 12 Law of demand elasticity, 436, 436n Layoffs, 839 Lead indicators, 12 Leading indicators, 611, 612 Lead time, 615–616, 812 Lean enterprises, 808–809 Lean manufacturing, 808 Learning and growth perspective, 12–13 Least squares regression analysis, 75–78, 716–717 “Less is not better,” 704 Life cycle costs, 791, 792 “Lights-out” environment, 808, 809 Limited liability companies (LLCs), 523 Limited liability partnerships (LLPs), 523 Linear programming (LP) basics of, 445 formulating a problem, 445–447 input–output coefficients, 446 introduction, 444 solving a problem, 448–449 Line personnel, 10 Local area network (LAN), 166 Long ton, 482 Losses, 30 Loss from Inefficient Operations, 286 Low-ball price, 440, 440n M Machine hour (MH), 78, 184 Make-or-buy decision, 429 Malcolm Baldrige National Quality Award (MBNQA), 766 See also Baldrige Award Management accounting, downstream costs, 3, financial accounting and, differences between, function of, upstream costs, 3, Management Accounting Guidelines (MAGs), Management-by-exception concept, 283 Management-by-exception principle, 552–553, 554, 743 Management information system (MIS), 517–518 Management practices, emerging business process reengineering (BPR), 837–838 downsizing, 839–840 enterprise resource planning (ERP) systems, 842–846 environmental management systems, 852–854 introduction, 836 layoffs, 839 open-book management, 847–852 restructuring, 839–840 strategic alliances, 846–847 value chain and cost management, 840 workforce diversity, 840–842 workplace, changing, 836–837 Managers, defined, 599n Manufacturer, defined, 32 Manufacturers versus service companies, 34–35 Manufacturing cells, 799 Manufacturing cycle efficiency (MCE), 117–118 Manufacturing overhead (OH), 67 Manufacturing Overhead control account, 171, 180 Margin of safety (MS), 399 Margin of safety percentage (MS%), 399 Market-based transfer prices, 568–569 Mass customization, 129 Subject Index Master budget budgeting process, 324–328 budget manual, 349–350 components of, 328 contingency planning, 328n defined, 327 illustrated (See Master budget illustrated) introduction, 324 management control, using for, 347–349 overview, 328–330, 328n revisions to, 348, 350, 350n Master budget illustrated budgeted financial statements (See Budgeted financial statements) capital budget, 334–335 cash budget (See Cash budget) direct labor budget, 333 introduction, 330–331 overhead budget, 334 personnel budget, 332 production budget, 331 purchases budget, 332, 333 selling and administrative budget, 334, 335 Material mix variance, 291–293 Material price variance (MPV), 270, 291–293 Material quantity variance (MQV), 270, 272 Material requisition form, 169–170 Material variance computations, 270–272 Material yield variance, 291–293 Mathematical programming, 444 Matrix algebra, 449 Mattel, 435 Mercedes-Benz USA, 751 Method of neglect, 233, 234–235, 235n Methods-time measurement (MTM), 266 Metric ton, 482 Microsoft, 528, 751 Mission statement, 8, 599–600 Mix, 291 Mixed cost, 28, 383 Mixed costs, separating defined, 73 estimation, simplification of, 73 flexible budgets, 78–79 high-low method, 74–75 least squares regression analysis, 75–78 outliers, 75 overhead rates, plantwide versus departmental, 79–80 straight-line formula, 73–74 Mix variances, 290 Modified accelerated cost recovery system (MACRS), 661 Monetary capital, 10 Monetary measure allocation approximated net realizable value at split-off allocation, 486–488 benefit of, 484, 484n net realizable value at split-off allocation method, 485–486 prorate joint cost to joint products, 484–485, 485n sales value at split-off allocation, 485 Money factor, 687 Mont Blanc pens, Multinational corporations, 14–15 Multinational enterprises (MNEs), 572 Multinational settings performance evaluation in, 619–620 transfer prices in, 570–573 Multiple regression, 75 Mutually exclusive projects, 667 Mutually inclusive project, 667 N NASCAR, 748 National Institute of Standards and Technology (Baldrige Award), 753 Negative gap analysis, 748 Negotiated transfer prices, 569 Neiman Marcus, Net present value (NPV), 656–657, 658–660 Net present value method, 655–657 Net realizable value (NRV), 485 Net realizable value (NRV) approach, 485–486, 487, 489, 489n Net realizable value at split-off allocation, 485–486 Noncontrollable variance, 276 Nonfinancial incentives, 624 Nonfinancial performance measures (NFPMs) comparison bases, establishment of, 616 financial performance measures, advantages over, 613 introduction, 612 Nonfinancial performance measures (NFPMs), selection of cost of quality, 615 introduction, 612–613 lead time, 615–616 throughput, 613–615, 614n Nonlinear programming, 445n Non-negativity constraint, 445 “Nonperforming” customers, 750 Non-value-added (NVA) activity eliminate or reduce, 786, 792 eliminating, 742 idle time, 116 labor activities, 803 master budget, 349 production view of quality, 742 transfer time, 116 value-added versus non-value-added activities, 114 Normal capacity, 73, 73n Normal costing actual versus, 67 alternative capacity measures, 73 defined, 67 expected capacity, 73, 73n introduction, 67 manufacturing overhead (OH), 67 normal capacity, 73, 73n overapplied overhead, disposition of, 71–72 overhead, applying to production, 69–71 practical capacity, 73 predetermined OH rate, 68–69 theoretical capacity, 73 underapplied overhead, disposition of, 71–72 Normal cost system, 39 Normal loss, 234–235 job order costing, 179 Not-for-profit (NFP) organization, 32, 476, 493, 493n 889 O Objective function, 445 Offset approach (See Net realizable value (NRV) approach) Offshoring, 428 Open-book management accountants, role of, 851–852 employee stock ownership plans (ESOPs), 851 games, as teaching aids, 849–850 implementation challenges, 851–852 introduction, 847–848 motivating employees, 850–851 performance measures, 852 ten common principles of, 848 Operating budget, 328 Operating leverage, 399–401 Operations flow document, 267 Opportunity costs, 426, 758 Optimal solution, 445 Options, 719–720 Order point, 812–813 Ordinary annuity, 674 Organizational constraints culture, 10 environmental, 10–11 intellectual capital, 10 management style, 10 monetary capital, 10 Organizational costs downstream, 3, upstream, 3, Organizational culture, 525–526 Organizational form, 523–526 Organizational goals, 600 Organizational-level costs, 121, 122 Organizational memory, 839 Organizational strategy core competency, 8–9 cost leadership, factors influencing, mission statement, product differentiation, questions, checklist of, strategy, Organizational structure authority, 10 CMS, designing, 523–526 constraints, 10–11 controllers, 10 defined, 10 line personnel, 10 responsibility, 10 staff personnel, 10 treasurers, 10 Organization of Economic Cooperation and Development (OECD), 15, 573 Outliers, 75 Outputs, 129 Outsourcing assessing outsourcing risk, 430 benefits of, 429 cost savings, 13 decision considerations, 429–430 defined, 428 fixed costs, 433 highest total contract values for work outsourced and offshored in 2008, 428 890 Outsourcing (continued) insourcing, 429, 432 just-in-time (JIT) technologies, 433 make-or-buy decision, 429 outsourcing decision, 429 relevant costs, 431 risk pyramid, 431 Outsourcing decisions introduction, 428 offshoring, 428 Overapplied overhead, 70–72, 72n Overhead accounts, 69n accumulation of, 38, 39–41 actual cost system, 38 allocation of, 38–39 applied, 69 appraisal costs, 37 budget, 334 cost allocation, 38 cost of goods manufactured and sold, 41–42 costs, lack of commonality in, 129–130 defined, 37 failure costs, 37 fixed overhead costs, 37 job order costing, 171 normal cost system, 39 overapplied overhead, 70–72 Overhead Control account, 38 overview, 171 predetermined overhead rate (or overhead application rate), 39 prevention costs, 37 process costing, 218, 218n production costs, 213 quality costs, 37 underapplied overhead, 70–72 variable overhead costs, 37 variances (See Overhead variances) Work in Process (WIP) Inventory, 38 Overhead (indirect costs), 30 Overhead (OH) rates plantwide versus departmental, 79–80 predetermined, reasons for using, 68 Overhead accounts, 69, 69n, 70 Overhead application rates, 39 Overhead Control account, 38, 39 See also Manufacturing Overhead control account Overhead variances alternative approaches, 277–279 budget variance, 278 controllable variance, 278 efficiency variance, 278–279 fixed overhead (FOH) variance, 275–277 fixed overhead spending variance, 276 noncontrollable variance, 276 predetermined OH rates, 273–274 spending variance, 278–279 total overhead variance, 277 variable (VOH) variances, 274–275 volume variance, 276–277 Overtime, 36–37 P Packaging, 117, 117n Panama Canal Authority and the Georgia Ports Authority, agreement between, 846 Subject Index Pareto analysis, 757–758 Pareto inventory analysis, 813–814 Pareto principle, 129, 129n Participatory budget, 348 Paul’s Pirogues, 178–179 Payback period, 654–655 Pay-for-performance plans, 620–622, 622n Performance measurements, 616–617 Performance measurement system, designing assess progress toward mission, 603 balanced scorecard (BSC), 617–619 compensation, ethical considerations of, 625–626 compensation elements, tax implications of, 624–625 compensation strategy, 620, 621 feedback, need for, 604 general criteria, 602–603 global compensation, 625 multinational settings, performance evaluation in, 619–620 pay-for-performance plans, 620–622 performance, appropriate tools for, 603–604 performance measurements, 616–617 performance measures, awareness of and participation in, 603 performance measures and rewards, links between, 622–624 Performance measures external, 601–602 internal, 600–601 introduction, 600 Performance measures and rewards, links between incentives relative to organizational level, 623 introduction, 622–623 nonfinancial incentives, 624 performance output, degree of control over, 623 performance plans and feedback, 623 promoting overall success, 624 worker pay and performance links, 623–624 Period costs, 30, 31 Perpetual inventory accounting system, illustration of, 39 Personal computers (PCs), 842 Personnel budget, 332 Perspectives, differences in, 611–612 Phantom profits, 86 Physical measure allocation, 482–484 Plato, 625 Point-of-purchase material variance model, 272–273 Postinvestment audit, 672 Practical capacity, 73 Practical or theoretical capacity, 803n Practical standards, 285 Predetermined overhead (OH) rates (or overhead application rates), 39 activity-based costing (ABC), 124 alternative capacity measures, 73 irrationality of current cost allocations, 130 job order costing, 177, 180, 181 overhead variances, 273–274, 277 plantwide versus departmental, 79–80 product costing, 68–69 standard cost card, 267 valuation methods, 164–165 Predictor, 29, 30 Preference decision, 666 “Preference” lists, 797 Present value (PV), 655, 655n, 657–658, 673 Prevention costs, 37, 754 Price elasticity, 699 Price-escalation clauses, 698 Price risk, using options and forward contracts to mitigate, 719–720 PricewaterhouseCoopers, 701 Prime cost, 31, 31nn Prior department cost, 226 Process benchmarking, 747 Process complexity, 129–130 Process costing equivalent units of production (EUP), 213–216 EUP, denominator in, 216, 216n FIFO EUP calculation, 232 first-in, first-out (FIFO) method, 211, 216–218, 223–226 hybrid costing systems, 231 introduction, 163, 211 multidepartment setting, 226–227 prior department cost, 226 production costs: the numerator, 211–213 production quantity: the denominator, 213 spoilage, 233–235 standard costs, with, 228–231 steps in, 217–218, 218n total cost to account for, 218 transferred-in cost, 226 WA EUP calculation, 231, 232 weighted average (WA) method, 216–218, 219–223 Process costing systems, 163–164 See also Process costing Processes, 115–116 Processing (service) time, 116 Process map, 116 Process productivity, 614 Process quality yield, 614 Process yield, 291 Procter & Gamble, 129 Product and material losses (job order costing) abnormal spoilage, 181 accounting treatment for, 179 all jobs, anticipated on, 180 introduction, 179 particular jobs, specifically identified with, 180 Product complexity, 125 Product contribution margin, 83, 383n Product cost, Product costing cost accumulation systems, 163–164 costing systems and inventory evaluation, 163n, 164 introduction, 163 methods, 163–164 valuation methods, 164–165 Product costs absorption cost, 36n accumulation, 39–41 burden, 37n definition of, 30, 36, 36n direct labor, 36–37 direct material, 36 overhead, 37–38 variable costing, 36n Product differentiation, 9, 526 Production, stages and cost of, 35 Subject Index Production activities and costs introduction, 788 life cycle costs, 791, 792 product life cycles, 789–791 target costing, 791–792, 793 Production center, 34 Production cost, 787 Product-level (process-level) cost, 121 Product life cycle, 789 Product life cycles decline stage, 791 design stage, 789 growth stage, 789–790 introduction, 789 maturity stage, 790 Product variety, 125 Professional ethics, 5–7 Profitability index (PI), 657–658, 658n Profit as performance measure, 601–602 Profit center, 555–556 Profit margin, 606 Profit sharing, 532, 624 Profit-volume (PV) graph, 387–388 Pseudo-profit center, 566, 566n Public Company Accounting Oversight Board (PCAOB), Pull systems, 787–788, 790 Purchase orders allocation bases, 558 common costs, 443n cost levels, 120 EDI (electronic data interchange), 802 JIT system, 803, 803n overhead, allocation of, 69 Purchases budget, 332, 333 Purchasing advances in authorizing and empowering, 714–715 decentralization and, 550 EOQ and, 811 e-procurement systems, 715 ERP and, 843 group purchasing, 700 information technology and, 714 inventory management and, 787–788 JIT systems and, 793 master budget and, 329 needs, determining, 282 point-of-purchase material variance model, 272–273 production process, 115–116 purchases, advances in authorizing and empowering, 714–715 purchases budget and, 332 scarce resources decisions, 433 vendor partnerships and, 797 Purchasing agents, 265–266, 700 Purchasing cost (for inventory), 787 Purchasing managers, 811 Pursuit of high quality, 754 Push system, 787, 789 Q Quality assessing internationally, 765–767 characteristics of, 744 consumer view of, 743–745 defined, 741 European Foundation for Quality Management (EFQM), 766–767 grade, 745 “high quality” versus “high grade,” 745 International Organization for Standardization (ISO), 765–766 measuring the cost of, 757–760 as an organizational culture, 763–765 production view of, 741–743 service, 744–745 value, 745 Quality, obtaining information about BSC, 761–763 CMS, 761–763 Quality as an organizational structure, 763–765 Quality audit, 765 Quality control (QC), 742 Quality Control Award for Operations, 754 Quality costs, types of accounting and information about, 755–757 appraisal, 37, 754 compliance, 755 cost behaviors, 38 external failure, 754 failure, 37 internal failure, 754 lack of high quality, 754 noncompliance, 755 prevention, 37, 754 pursuit of high quality, 754 time-phase model for quality costs, 757 total quality cost, formulas for calculating, 760 Quality Is Free (Crosby), 757 Quantity purchased, 700 R Radio frequency identification (RFID), 522 Random, 715–716 Random effects, 623 Raw (Direct) Material Inventory accounts, 268 Raw and In-Process (RIP) Inventory account, 804 Raw material, 32 Raw Material (RM) Inventory, 39, 169 Reality mining, 846 Realized value approach, 490–492 Receiving Department, 118 Red-line system, 813 Regression line, 76–78 Reinvestment assumptions, 668 Relevance, concept of bearing on the future, 426 decision, association with, 425–426 importance to decision maker, 426 introduction, 425 Relevant costing, 425 See also Relevant information for decision making Relevant costs for specific decisions introduction, 428 outsourcing decisions, 428–433 product line, 442–443, 444 sales mix decisions, 435–439 scarce resource decisions, 433–435 segment margin, 443 special order decisions, 440–442 Relevant information for decision making introduction, 425 linear programming, 444–449 891 relevance, concept of, 425–426 specific decisions, relevant costs for, 428–444 sunk costs, 426–428 Relevant range, 26, 383, 383n Renewable energy certificates, 853 Research and development (R&D) costs, 761 Residual income (RI), 609, 610–611 Resource constraints, 446n Responsibility, 10 Responsibility accounting system basic control functions, 552 defined, 551 goal congruence, 553 manager’s responsibility report, 552 responsibility reports, 551, 552 “rolling up” (aggregating) of information, 553 variances, 552–553 Responsibility centers cost center, 554–555, 555n investment center, 556 profit center, 555–556 revenue center, 555 types of, 554 Responsibility reports, 551 Restructuring, 839–840 Results benchmarking, 746 Return of capital, 655 Return on capital, 655 Return on investment (ROI), 2, 605–609, 609n, 610–611 Revenue, 383 Revenue and limited cost center, 555 Revenue center, 555 Reverse engineering, 746 Risk, 668 Risk-adjusted discount rate method, 669–670 Ritz-Carlton, 751 Robinson-Patman Act, 396n, 441 Rolling budget, 347 Ryan & Company, 701 S Safety stock, 812–813 Sales mix, 435 Sales mix decisions ad hoc discounts, 441 advertising budget changes, 438–439 demand, decline in, 436n fixed costs, 440 introduction, 435 Robinson-Patman Act, 441 sales compensation changes, 438–439, 438nn sales price changes and relative profitability of products, 435–438, 438n special order decisions, 440 Sales price variance, 555 Sales value at split-off allocation, 485 Sales volume variance, 555 Sam’s Club buildings, 701 Sarbanes-Oxley Act of 2002 (SOX), 2, 572, 752 (Section 404), 531 Scarce resource decisions, 433–435 Scarce resources, 433 Scrap, 476 Screening decision, 666 “Secret shoppers,” 744 Securities and Exchange Commission (SEC), 2, 83, 517 892 Securities ratings, 711 Segment margin, 443, 604–605, 604n Selling and administrative (S&A) expenses, 334 Selling and administrative budget, 334, 335 Selve, 129 Sensitivity analysis asset, range of the life of, 672 cash flows, range of, 671 discount rate, range of, 670–671 effects of uncertainty, 718 introduction, 670 Separate costs, 476 Service businesses, 34, 41, 128, 493, 493n Service company defined, 32 versus manufacturers, 34 Service cycle efficiency, 118 Service department, 556 Service department cost allocation illustration algebraic method, 562–565 direct method, 560–561 introduction, 559–560 overhead application rates, determining, 565 step method, 561–562 Service quality, 744–745 Shift premiums, 36–37 Short-term financial performance measures for management cash flow, 605 divisional profits, 604–605 economic value added (EVA®), 609–610, 609n economic value added (EVA®), limitations of, 610–611 introduction, 604 residual income (RI), 609 residual income (RI), limitations of, 610–611 return on investment (ROI), 605–609, 609n return on investment (ROI), limitations of, 610–611 Shrinkage, 179 Simple interest, 673 Simple regression, 75 Simplex method, 449 Single cash flow, present value of, 673–674 “Situation,” positive or negative, 801 Six sigma, 742, 808 Slack variable, 449 “Slowdown” tactics, 266–267 Society of Management Accountants of Canada, Special order decision, 440 Split-off point, 479 Spoilage, 179, 233–235 Springfield Remanufacturing, 848 Staff personnel, 10 Standard cost card, 267–268 Standard cost system journal entries, 279–282 Standard cost systems allocated, 268 applied, 268 component prices, 265–266 introduction, 264–265 labor standards, 266–267 material standards, 265–266 overhead (OH) standards, 267–268 valuation methods, 164–165 variance, 268 waste of components, 265, 265n Standard cost systems, reasons for using, 283–284 Subject Index advantages of, 282 controlling, 283 decision making, 284 motivating, 282 performance evaluation, 284 planning, 282 variances, 283–284 Standard hours, 280 Standard price (SP), 269 Standard quantity, 269 Standards, 264 establishing (See Establishing standards) expected, 285 ideal (theoretical) standards, 285–286 labor, 266–267 material, 265–266 overhead, 267–268 practical, 285 standard cost systems, 264 theoretical capacity, 286 usage (See Standards usage) Standards usage adjusting standards, 286–288 direct labor, decline in, 288 ideal (theoretical) standards, 285–286 material price variance based on usage rather than purchases, 288 theoretical capacity, 286 Statement of cash flows (SCF), 343–347, 605 Statement of Ethical Professional Practice, Statements on Management Accounting (SMAs), Statistical process control (SPC), 742 Step cost, 29 Step fixed cost, 29 Step method, 558, 561–562 Step variable cost, 29 Stock-keeping units (SKUs), 129 Straight-line formula, 73–74 Strategic alliances, 846–847 Strategic benchmarking, 748 Strategic planning, 324–325 Strategy, “Stretch” goals, 838 Strict equality constraints, 446n Suboptimization, 556, 611 “Sunk” costs, 426, 482 Supplier Cost Adjustments, 699 Supply-chain management, 801–802 information technology and purchasing, 714 introduction, 714 purchases, advances in authorizing and empowering, 714–715 supply-chain relationships, 714 Support department cost allocation administrative departments, 556 allocation bases, 556–558 introduction, 556 methods of, 558–559 service department, 556 Support departments, 556 Surplus variable, 449 T Tactical planning, 324–327 Tangible output, 32 Target costing, 791–792, 793 Tax benefit (of depreciation), 661 Tax deferral, 624 Tax exemption, 624 Tax Reform Act of 1986, 661 Tax shield (of depreciation), 661 Teevin Bros Land and Timber Company, 31 Theoretical capacity, 73, 286 Theory of constraints (TOC), 809–810 Throughput, 613–615, 614n Time lines, 653–654 Time value of money, 655, 655n, 673 Ton, 482 Total Cost Management Center (Ford), 700 Total cost of ownership (TCO), 265–266 Total cost to account for, 42, 218 Total material variance (TMV), 272 Total overhead variance, 277 Total quality management (TQM) Baldrige Award, 753–754 defined, 749 Deming Prize, 754 employee involvement, 749–750 ideal standards and, 285 long-term supplier relationships, 750 product/service improvement, 750 quality, measuring the cost of, 758 quality as an organizational structure, 763–765 quality system, 749 Total units to account for, 219–220 Total variance, 269 Toyota, 9, 26 Trading costs, 28 Transactional relationships, 802 Transfer price, 565 Transfer prices in multinational settings, 570–573 Transfer pricing cost-based transfer prices, 567–568, 567n dual pricing, 569 introduction, 565–567 market-based transfer prices, 568–569 negotiated transfer prices, 569 pseudo-profit center, 566, 566n Transfer pricing system, selecting, 569–570 Transferred-in cost, 226 Transferred-out cost, 222 Transfer time, 116 Treasurers, 10 Two-bin system, 813 U Uncertainty, dealing with and cost structure, relationship between, 719 defined, 715 explicitly considering when estimating future costs, 716–718 insuring against occurrences of specific events, 720 structuring costs to adjust to uncertain outcomes, 718–719 using options and forward contracts to mitigate price risk, 719–720 Uncertainty, nature and causes of causes and effects, 715–716 unforeseen events, occurrence of, 716 Underapplied overhead, 70–72, 72n Underwriters Laboratories, 765 Subject Index Unexpired cost, 25 Unit contribution margin, 434 Unit cost formula for determining, 211 production costs: the numerator, 211–213 production quantity: the denominator, 213 separate calculations of, 215n Unit-level costs, 120 Units (use of term), 165n Units started and completed, 219 University of St Thomas, 750 Upstream costs, 3, Usage, 812 U.S Office of Federal Procurement Policy, U.S tax rate, 661, 661n V Valuation methods, 164–165 Value, 745 Value-added (VA) activity, 114, 742, 786 Value-added (VA) versus non-value-added (NVA) activities, 114–117, 117n Value chain, 786–787 communication network, 12 components of, 11 cost management system (CMS), 535 customer service, 12 defined, 11 design, 11 distribution, 12 marketing, 12 production, 11 research and development, 11 supply, 11 Value chart, 117 Value engineering (VE), 792 Values statement, 599 Variable (VOH) variances, 274–275 Variable cost, 26–27, 383 Variable costing absorption costing, comparison to, 86–87 absorption costing, differences between, 82–83 defined, 81–82 illustrations, 84–86 income statement, 83 relationships, 83 Variable cost of goods sold, 83 Variable cost ratio (VC%), 385 Variable Manufacturing Overhead Control, 274 Variable overhead (VOH) rate, 274 Variable overhead costs, 37 Variable overhead efficiency variance, 275 Variable overhead spending variance, 274–275 Variance analysis, 283 Variance analysis model favorable (F), 269, 270 total variance, 269 total variance, diagrammed, 270 unfavorable (U), 269, 270 Variances actual costs, 228n analysis model, 269–270 JIT and, 802–804 labor, 273 material variance computations, 270–272 overhead, 273–279 point-of-purchase material variance model, 272 responsibility accounting systems, 552–553 revenue, 555n sales price, 555 sales volume, 555 standard cost system, 176–177, 268 Vendor certification, 797 Vendor partnerships, 797, 798 Vertex, 448 893 Virtual reality, 791 Volume variance, 86, 276–277 W WA EUP calculation, 231, 232 Waldenbooks, Wal-Mart, 9, 117n, 522, 525–526, 747–748 Waste, 477 Weighted average (WA) method, 211, 216–218, 219–223 Worker pay, 623–624 Workers, defined, 599n Workforce diversity, 840–842 Working capital, 711 Work in process, 32 Work in Process (WIP) Inventory actual cost system, 38 first-in, first-out (FIFO), 211 perpetual inventory system, 39 predetermined OH rate, 68 process costing, 213 weighted average (WA), 211 Work in Process (WIP) Inventory account, 34, 268 Work in Process (WIP) valuation methods, 164–165 Workplace, the changing, 836–837 X Xbox 360, 528–529, 751 Xerox, 766 Y “Yardsticks,” 532 Yield, 291 Yield variances, 290 Young employees, 621–622, 622n ... a separate cost of $649, 026 Division JP#8 9-4 3-B 20 4,000 pounds processed at a separate cost of $387,600 JP#8 9-4 3-A 21 4 ,20 0 pounds processed at a separate cost of $ 122 ,094 BP#8 9-4 3-X 91,800 tons... JP#8 9-4 3-A and JP#8943-B in Divisions and record incurrence of packaging cost for product JP#8 9-4 3-A transfer completed products JP#8 9-4 3-A and JP#8 9-4 3-B to finished goods c Allocate the joint cost. .. Joint Cost Allocated Joint Cost $ 771, 120 0.59 $ 520 ,000 $306,800 540,600 0.41 520 ,000 21 3 ,20 0 $1,311, 720 1.00 * $ 520 ,000 JP#8 9-4 3-A Selling price per pound JP#8 9-4 3-B $8.00 $4.70 Separate costs