Ebook Cost management - Accounting & control (6th edition): Part 2

(BQ) Part 2 book Cost management - Accounting & control has contents: Strategic cost management, quality and environmental cost management, productivity measurement and control, lean accounting, pricing and proi tability analysis, capital investment, cost volume-proit analysis,...and other contents.

© Photodisc/getty Images Chapters 11 Strategic Cost Management 12 Activity-Based Management 13 The Balanced Scorecard: Strategic-Based Control 14 Quality and Environmental Cost Management 15 Productivity Measurement and Control 16 Lean Accounting Strategic Cost Management © ImageSource/Getty Images AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO: Explain what strategic cost management is and how it can be used to help a firm create a competitive advantage Discuss value-chain analysis and the strategic role of activity-based customer and supplier costing Tell what life-cycle cost management is and how it can be used to maximize profits over a product’s life cycle Identify the basic features of JIT purchasing and manufacturing Describe the effect JIT has on cost traceability and product costing Why is one brand of ice cream viewed as better than another brand? It may reflect a deliberate decision by an ice cream producer to design and make an ice cream product that uses special ingredients and flavors rather than simply the ordinary It is a means of differentiating the product and making it unlike those of competitors It also may mean a conscious decision has been made to target certain types of consumers—consumers who are willing to pay for a higher quality, specialized ice cream Whether this is a good strategy or not depends on its profitability Cost management plays a vital role in strategic decision making Cost information is critical in formulating and choosing strategies as well as in evaluating the continued viability of existing strategic positions In Chapter 4, the basic concepts of activity-based costing were introduced These concepts were illustrated using the traditional product cost definition Activity-based product costing can significantly improve the accuracy of traditional product costs Thus, 376 Chapter 11 Strategic Cost Management 377 inventory valuation is improved, and managers (and other information users) have better information concerning the costs of products leading to more informed decision making Yet the value of the traditional product cost definition is limited and may not be very useful in certain decision contexts For example, corporations engage in decision making that affects their long-run competitive position and profitability Strategic planning and decision making require a much broader set of cost information than that provided by product costs Cost information about customers, suppliers, and different product designs is also needed to support strategic management objectives This broader set of information should satisfy two requirements First, it should include information about the firm’s environment and internal workings Second, it must be prospective and thus should provide insight about future periods and activities A value-chain framework with cost data to support a value-chain analysis satisfies the first requirement Cost information to support product life-cycle analysis is needed to satisfy the second requirement Value-chain analysis can produce organizational changes that fundamentally alter the nature and demand for cost information Just-in-time (JIT) manufacturing is an example of a strategic approach that alters the nature of the cost accounting system In this chapter, we introduce strategic cost management, life-cycle cost management, and JIT manufacturing The JIT approach is used to illustrate the value-chain concepts STRATEGIC COST MANAGEMENT: BASIC CONCEPTS Decision making that affects the long-term competitive position of a firm must explicitly consider the strategic elements of a decision The most important strategic elements for a firm are its long-term growth and survival Thus, strategic decision making is choosing among alternative strategies with the goal of selecting a strategy, or strategies, that provides a company with reasonable assurance of long-term growth and survival The key to achieving this goal is to gain a competitive advantage Strategic cost management is the use of cost data to develop and identify superior strategies that will produce a sustainable competitive advantage Strategic Positioning: The Key to Creating and Sustaining a Competitive Advantage Competitive advantage is creating better customer value for the same or lower cost than offered by competitors or creating equivalent or better value for lower cost than offered by competitors Customer value is the difference between what a customer receives (customer realization) and what the customer gives up (customer sacrifice) What a customer receives is more than simply the basic level of performance provided by a product.1 What is received is called the total product The total product is the complete range of tangible and intangible benefits that a customer receives from a purchased product Thus, customer realization includes basic and special product features, service, quality, instructions for use, reputation, brand name, and any other factors deemed important by customers Customer sacrifice includes the cost of purchasing the product, the time and effort spent acquiring and learning to use the product, and postpurchase costs, which are the costs of using, maintaining, and disposing of the product Increasing customer value to achieve a competitive advantage is tied closely to judicious strategy selection Three general strategies have been identified: cost leadership, product differentiation, and focusing.2 Cost Leadership The objective of a cost leadership strategy is to provide the same or better value to customers at a lower cost than offered by competitors Essentially, if customer value is defined as the difference between realization and sacrifice, a low-cost strategy increases customer Keep in mind that our definition of product includes services Services are intangible products See M E Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985), for a more complete discussion of the three strategic positions OB JECTI V E Explain what strategic cost management is and how it can be used to help a firm create a competitive advantage 378 Part Three Advanced Costing and Control value by minimizing customer sacrifice In this case, cost leadership is the goal of the organization For example, a company might redesign a product so that fewer parts are needed, lowering production costs and the costs of maintaining the product after purchase Differentiation A differentiation strategy, on the other hand, strives to increase customer value by increasing what the customer receives (customer realization) A competitive advantage is created by providing something to customers that is not provided by competitors Therefore, product characteristics must be created that set the product apart from its competitors This differentiation can occur by adjusting the product so that it is different from the norm or by promoting some of the product’s tangible or intangible attributes Differences can be functional, aesthetic, or stylistic For example, a retailer of computers might offer on-site repair service, a feature not offered by other rivals in the local market Or a producer of crackers may offer animal-shaped crackers, as Nabisco did with Teddy Grahams, to differentiate its product from other brands with more conventional shapes To be of value, however, customers must see the variations as important Furthermore, the value added to the customer by differentiation must exceed the firm’s costs of providing the differentiation If customers see the variations as important and if the value added to the customer exceeds the cost of providing the differentiation, then a competitive advantage has been established Focusing A focusing strategy is selecting or emphasizing a market or customer segment in which to compete One possibility is to select the markets and customers that appear attractive and then develop the capabilities to serve these targeted segments Another possibility is to select specific segments where the firm’s core competencies in the segments are superior to those of competitors A focusing strategy recognizes that not all segments (e.g., customers and geographic regions) are the same Given the capabilities and potential capabilities of the organization, some segments are more attractive than others Strategic Positioning In reality, many firms will choose not just one general strategy, but a combination of the three general strategies Strategic positioning is the process of selecting the optimal mix of these three general strategic approaches The mix is selected with the objective of creating a sustainable competitive advantage A strategy, reflecting combinations of the three general strategies, can be defined as: choosing the market and customer segments the business unit intends to serve, identifying the critical internal business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives.3 What is the role of cost management in strategic positioning? The objective of strategic cost management is to reduce costs while simultaneously strengthening the chosen strategic position Remember that a competitive advantage is tied to costs For example, suppose that an organization is providing the same customer value at a higher cost than its competitors By increasing customer value for specific customer segments (e.g., using differentiation and focusing to strengthen the strategic position) and, at the same time, decreasing costs, the organization might reach a state where it is providing greater value at the same or less cost than its competitors, thus creating a competitive advantage Robert S Kaplan and David P Norton, The Balanced Scorecard (Boston: Harvard Business School Press, 1996): 37 Chapter 11 Strategic Cost Management 379 Value-Chain Framework, Linkages, and Activities Successful pursuit of a sound strategic position mandates an understanding of the industrial value chain The industrial value chain is the linked set of value-creating activities from basic raw materials to the disposal of the finished product by end-use customers Exhibit 11-1 illustrates a possible industrial value chain for the petroleum industry A given firm operating in the oil industry may not—and likely will not—span the entire value chain The exhibit illustrates that different firms participate in different portions of the value chain Most large oil firms such as Exxon Mobil and ConocoPhillips are involved in the value chain from exploration to service stations (like Firm A in Exhibit 111) Yet even these oil giants purchase oil from other producers and also supply gasoline to service station outlets that are owned by others Furthermore, there are many oil firms that engage exclusively in smaller segments of the chain such as exploration and production or refining and distribution (like Firms B and C in Exhibit 11-1) Thus, breaking down the value chain into its strategically relevant activities is basic to successful implementation of cost leadership and differentiation strategies A value-chain framework is a compelling approach to understanding a firm’s strategically important activities Fundamental to a value-chain framework is the recognition that there exist complex linkages and interrelationships among activities both within and beyond the firm Two types of linkages must be analyzed and understood: internal linkages and external linkages EXHI B IT 11-1 Value Chain for the Petroleum Industry Oil Exploration Firm B Oil Production Oil Refining Firm A Firm C Oil Distribution Gas Distribution Service Stations End-Use Customer Product Disposal 380 Part Three Advanced Costing and Control Internal linkages are relationships among activities that are performed within a firm’s portion of the value chain External linkages, on the other hand, describe the relationship of a firm’s value-chain activities that are performed with its suppliers and customers External linkages, therefore, are of two types: supplier linkages and customer linkages To exploit a firm’s internal and external linkages, we must identify the firm’s activities and select those that can be used to produce (or sustain) a competitive advantage This selection process requires knowledge of the cost and value of each activity For strategic analysis, activities are classified as organizational activities and operational activities; the costs of these activities, in turn, are determined by organizational and operational cost drivers Organizational Activities and Cost Drivers Organizational activities are of two types: structural and executional Structural activities are activities that determine the underlying economic structure of the organization Executional activities are activities that define the processes and capabilities of an organization and thus are directly related to the ability of an organization to execute successfully Organizational cost drivers are structural and executional factors that determine the long-term cost structure of an organization Thus, there are two types of organizational drivers: structural cost drivers and executional cost drivers Possible structural and executional activities with their cost drivers are listed by category in Exhibit 11-2 EXHI BI T 11-2 Organizational Activities and Drivers Structural Activities Building plants Management structuring Grouping employees Having complexity Vertically integrating Selecting and using process technologies Structural Cost Drivers Number of plants, scale, degree of centralization Management style and philosophy Number and type of work units Number of product lines, number of unique processes, number of unique parts, degree of complexity Scope, buying power, selling power Types of process technologies, experience Executional Activities Executional Cost Drivers Using employees Providing quality Providing plant layout Designing and producing products Providing capacity Degree of involvement Quality management approach Plant layout efficiency Product configuration Capacity utilization As the exhibit shows, it is possible (and perhaps common) that a given organizational activity is driven by more than one driver For example, the cost of building plants is affected by number of plants, scale, and degree of centralization Similarly, having complexity may be driven by the number of different products, number of unique processes, and number of unique parts Of more recent interest and emphasis are executional drivers Considerable managerial effort is being expended to improve how things are done in an organization Continuous improvement and its many faces (employee empowerment, total quality management, Chapter 11 Strategic Cost Management 381 process value analysis, life-cycle assessment, etc.) are what executional efficiency is all about Consider employee involvement and empowerment The cost of using employees decreases as the degree of involvement increases Employee or worker involvement refers to the culture, degree of participation, and commitment to the objective of continuous improvement Operational Activities and Drivers Operational activities are day-to-day activities performed as a result of the structure and processes selected by the organization Examples include receiving and inspecting incoming parts, moving materials, shipping products, testing new products, servicing products, and setting up equipment Operational cost drivers (activity drivers) are those factors that drive the cost of operational activities They include such factors as number of parts, number of moves, number of products, number of customer orders, and number of returned products As should be evident, operational activities and drivers are the focus of activity-based costing Possible operational activities and their drivers are listed in Exhibit 11-3 EXHI B IT 11-3 Unit-Level Activities Grinding parts Assembling parts Drilling holes Using materials Using power Using employees Batch-Level Activities Setting up equipment Moving batches Inspecting batches Reworking products Product-Level Activities Redesigning products Expediting Scheduling Testing products Operational Activities and Drivers Unit-Level Drivers Grinding machine hours Assembly labor hours Drilling machine hours Pounds of material Number of kilowatt-hours Degree Batch-Level of involvement Drivers Number of setups Number of moves Inspection hours Number of defective units Product-Level Drivers Number Number Number Number of of of of change orders late orders different products procedures The structural and executional activities define the number and nature of the day-today activities performed within the organization For example, if an organization decides to produce more than one product at a facility, then this structural choice produces a need for scheduling Similarly, providing a plant layout defines the nature and extent of the materials handling activity Although organizational activities define operational activities, analysis of operational activities and drivers can be used to suggest strategic choices of organizational activities and drivers For example, knowing that the number of moves is a measure of consumption of the materials handling activity by individual products may suggest that resource spending can be reduced if the plant layout is redesigned to reduce the number of moves needed Operational and organizational activities and their associated drivers are strongly interrelated Exhibit 11-4 illustrates the circular nature of these relationships 382 Part Three EXHI BI T Advanced Costing and Control 11-4 Organizational and Operational Activity Relationships Organizational Activity (Selecting and using process technologies) Operational Driver (Number of moves) Structural Cost Driver (JIT: Type of process technology) Operational Activity (Moving material) VALUE-CHAIN ANALYSIS OBJECTIVE Discuss value-chain analysis and the strategic role of activity-based customer and supplier costing Value-chain analysis is identifying and exploiting internal and external linkages with the objective of strengthening a firm’s strategic position The exploitation of linkages relies on analyzing how costs and other nonfinancial factors vary as different bundles of activities are considered Also, managing organizational and operational cost drivers to create long-term cost reduction outcomes is an important input in value-chain analysis when cost leadership is emphasized Exploiting Internal Linkages Sound strategic cost management mandates the consideration of that portion of the value chain in which a firm participates (called the internal value chain) Exhibit 11-5 reviews the internal value-chain activities for an organization Activities before and after production must be identified and their linkages recognized and exploited Exploiting internal linkages means that relationships between activities are assessed and used to reduce costs and increase value For example, product design and development activities occur before production and are linked to production activities The way the product is designed affects the costs of production How production costs are affected requires a knowledge of cost drivers Thus, knowing the cost drivers of activities is crucial for understanding and exploiting linkages If design engineers know that the number of parts is a cost driver for various production activities (material usage, direct labor usage, assembly, inspection, materials handling, and purchasing are examples of activities where costs could be affected by number of parts), then redesigning the product so that it has standard parts, multiple sources, short lead times, and high quality can significantly reduce the overall cost of the product The design activity is also linked to the service activity in the firm’s value chain By producing a product with fewer parts, there is less likelihood of product failure and, thus, less cost associated with warranty agreements (an important customer service) Furthermore, the cost of repairing products under warranty should also decrease because fewer parts usually means simpler repair procedures Chapter 11 Strategic Cost Management 11-5 EXHI B IT 383 Internal Value Chain Design Service Develop Distribute Produce Market Internal Linkage Analysis: An Example To provide a more concrete foundation for the internal linkage concepts, let’s consider a specific numerical example Assume that a firm produces a variety of high-tech medical products One of the products has 20 parts Design engineers have been told that the number of parts is a significant cost driver (operational cost driver) and that reducing the number of parts will reduce the demand for various activities downstream in the value chain Based on this input, design engineering has produced a new configuration for the product that requires only eight parts Management wants to know the cost reduction produced by the new design They plan to reduce the price per unit by the per-unit savings Currently, 10,000 units of the product are produced The effect of the new design on the demand for four activities follows Activity capacity, current activity demand (based on the 20-part configuration), and expected activity demand (based on the 8-part configuration) are provided Activities Material usage Assembling parts Purchasing parts Warranty repair Activity Driver Number of parts Direct labor hours Number of orders Number of defective products Activity Capacity Current Activity Demand Expected Activity Demand 200,000 10,000 15,000 1,000 200,000 10,000 12,500 800 80,000 5,000 6,500 500 Additionally, the following activity cost data are provided: Material usage: $3 per part used; no fixed activity cost Assembling parts: $12 per direct labor hour; no fixed activity cost Purchasing parts: Three salaried clerks, each earning a $30,000 annual salary; each clerk is capable of processing 5,000 purchase orders Variable activity costs: $0.50 per purchase order processed for forms, postage, and so on 384 Part Three Advanced Costing and Control Warranty repair: Two repair agents, each paid a salary of $28,000 per year; each repair agent is capable of repairing 500 units per year Variable activity costs: $20 per product repaired Using the information in the table and the cost data, the potential savings produced by the new design are given in Exhibit 11-6 Cost behavior of individual activities is vital for assessing the impact of the new design Knowing the cost of different design strategies is made possible by assessing the linkages of activities and the effects of changes in demand for the activities Notice the key role that the resource usage model plays in this analysis.4 The purchasing activity currently supplies 15,000 units of activity capacity, acquired in steps of 5,000 units (Capacity is measured in the number of purchase orders—see Exhibit 11-7 for a graphical illustration of the activity’s step-cost behavior.) Reconfiguring the product reduces the demand from 12,500 orders to 6,500 orders At this point, management has the capability of reducing resource spending by $30,000 (the price of one purchasing clerk) Furthermore, since demand decreases, resource spending for the resources acquired as needed is also reduced $3,000 by the variable component ($0.50 × 6,000) A similar analysis is carried out for the warranty activity The activitybased costing model and knowledge of activity cost behavior are powerful and integral components of strategic cost management EXHI BI T 11-6 Cost Reduction from Exploiting Internal Linkages Material usage Labor usage Purchasing Warranty repair Total Units Unit savings $360,000a 60,000b 33,000c 34,000d $487,000 10,000 $48.70 (200,000 − 80,000)$3 (10,000 − 5,000)$12 c [$30,000 + $0.50(12,500 − 6,500)] d [$28,000 + $20(800 − 500)] a b Exploiting Supplier Linkages Although each firm has its own value chain, as was shown in Exhibit 11-1, each firm also belongs to a broader value chain—the industrial value chain The value-chain system also includes value-chain activities that are performed by suppliers and buyers Exploiting external linkages means managing these linkages so that both the company and the external parties receive an increase in benefits Suppliers provide inputs and, as a consequence, can have a significant effect on a user’s strategic positioning For example, assume that a company adopts a total quality control approach to differentiate and reduce overall quality costs Total quality control is an approach to managing quality that demands the production of defect-free products Reducing defects, in turn, reduces the total costs spent on quality activities Yet if the components are delivered late and are of low quality, there is no way the buying company can produce high-quality products and deliver them on time to its customers To achieve a defect-free state, a company is strongly dependent on its suppliers’ ability to provide defect-free parts Once this linkage is understood, then a company can work closely with its suppliers so that the product being purchased meets its needs Honeywell understands this linkage and has established a supplier review board with the objective of improving business relationships and material quality Its evaluation and selection of suppliers is based on factors such as product quality, delivery, reliability, continuous improvement, The resource usage model was introduced in Chapter 818 Subject Index income statement(s) manufacturing firm, 30–32 absorption-costing, 677, 677, 678, 682 activity-based costing, 684 break-even solution, 600 budgeted, 259–260 comparative, 680 of dot-coms, 33 full-costing income, 30 for manufacturing firm, 4, 30–32, 31 ABC segmented, 644 absorption-costing, 30 pro forma, 250–251 service organization, 32 variable-costing, 679, 683 service organization, 32 income taxes optimal determination of, 355 paid, use of transfer pricing and, 356–358 independent multiple-product production, 227 independent projects, 715 independent variable, 59 indirect costs, 25 allocating, 26 assigning, 25–26 traceability of, 25 individual quality costs, multiple-period trend graph, 509 industrial value chain, 379, 384 inflows, in financial budgets, 251 information, see also data for budget, 252–253 cost accumulation, 132–133 local, decision quality and, 338 for production and shipping, 254 production of unit cost, 135–136 quality cost information and decision making, 502–505 information system capabilities, 479 financial accounting, 4–5 information technology (IT) advances in, 7–8, 33 Balanced Scorecard and, 479 for customer service, 213 in health care, 716 innovation process, 475 objectives and measures, 476 inputs activities as, 534 in discounted cash flow models, 732 in job-order costing system, 138–139 partial measures and, 537 prices, base period, 536, 539 productive, 541 nonuniform application of, 174–176 standard cost sheet, 300 unit, 298–299 inseparability, 26 Institute of Internal Auditors (IIA), 14 Institute of Management Accountants (IMA), 12 intangibility, 26 Integrated Profit Management System (IPMS), 686 integration, of information technology, integrity, 13 interactive viewpoint, 391–393 Internal Revenue Service, 356, 357 intercept parameter, 59 interest, compounding of, 737 interim quality performance report, 507, 508 standards, 507 intermediate stages, of activity-based costing, 101–102 internal benchmarking, 438 internal constraints, 772 binding, 773 multiple, 773–776 internal failure activities, environmental, 513 internal failure costs, 499, 499 environmental, 512 internal linkages, 380 analysis, example, 383–384 exploiting, 382–384 internal measures, 470 internal rate of return (IRR), 719, 721–722 and NPV, 722–724 analysis, cash flow pattern, 725 conflicting signals, 723 mutually exclusive projects, 722–725 and uneven cash flows, 722 internal value chain, 382, 383 international trade dumping in, 674 ERP in, 355 Internet cost management with, 57 trading on, Internet-based firms, 57 interval, confidence, 65–66 interviews, for data collection, 98 introduction stage, 389 inventory, 777 beginning work-in-process, 32, 172–173, 176 carrying, reasons for, 762 carrying costs and, 761 changes in, under absorption and variable costing, 680 cost of, 135 finished goods, accounting for, 141, 144–145 income manipulation for, 678 JIT, manufacturing and, JIT management, 766–772 justifying, 761, 762 lowering cost of, 569 overproduction and, 571 policy, direct materials in inventory and, 256 time buffer as, 779 valuation of, 178–179 waste and, 568 work-in-progress, 89, 172–173 inventory budget, ending finished goods, 257–258 inventory effects, JIT, 396–397 inventory file, work-in-process, 138 inventory management, 760–782 EOQ and, 765–766 just-in-case, 761–766, 765 just-in-time, 766–772 investment(s) in advanced technology and pollution prevention technology, 732–736 capital, 714–736 data, direct, intangible, and indirect benefits, 734 differences among, 732–733 investment center, 337 divisions as, 337 measuring performance economic value added, 343–346 multiple measures of, 346 residual income, 342–343 return on investment, 339–342 IPMS, see Integrated Profit Management System (IPMS) IRR, see internal rate of return (IRR) irrelevant cost, 641 illustrated, 636–637 ISO 9000 Standards, 505, 505 IT, see information technology (IT) J JIT, see just-in-time (JIT) approach job(s), cost accumulation by, 137 job-order costing procedures, 188 specific cost flow description, 141 system, 130–132, 137, 168 general description, 137–141 normal, 134 overview, 137–139 job-order cost sheet, 138, 138 completed, 145 job-order procedures, 188 job order system JIT effect on, 400 traditional, accounting for spoilage in, 150–151 Subject Index job time tickets, 139–140 joint costs, allocating, 230 joint production process, 226 accounting for, 226–232 operation characterized by, 228 joint products, 226, 647–648 accounting for costs, 226–232 and by-products, distinction and similarity between, 227–228 cost allocation, 227 journal entries, in FIFO costing method, 179–180 judgment, managerial, 71–72 justifying inventory, 761 just-in-case inventory management, 761–766 just-in-time (JIT) approach avoidance of shutdown and process reliability, 768–771 and cost management system, 172–173, 398–403 and CVP analysis, 612 deficiency of, 772 inventory management, 9, 766–772 job-order and process-costing systems, 400 limitations, 771–772 manufacturing, 8–9, 395–398, 771 lean, 563–564 objectives, 766 plant layout and, 396–397 product cost assignment, 400 purchasing, 395–398, 568–569, 771 and push-through system, 396 to setup and carrying costs, 767–768 total quality control and, 506 traceability of overhead costs, 399 vs traditional manufacturing and purchasing, 399 K kaizen costing, 433, 434, 437, 437 kaizen standards, 298 role of, 437–438 kanban system, 768–771, 770 production, 769, 769, 770 vendor, 769 withdrawal, 769, 769, 770 keep-or-drop analysis ABC, 643–646, 646 activity information, 645 keep-or-drop decisions, 642–646 ABC analysis, 643–646 L labor, see also direct labor accounting for direct labor cost, 142–143 819 budget for direct, 255 direct costs and units of production, 135 efficiency, 575 as overhead resource, 101, 140 in process-costing system, 168 as product cost, 90 productivity measure, 575 as resource, 99 labor and direct materials variances, investigating, 306–307 labor efficiency variance (LEV), formula approach, 304–306 lag measures, 470 leadership, cost, 377–378 lead measures (performance drivers), 470 lead time, 763 lean accounting, 562–563, 571–577 focused value streams and traceability of overhead costs, 571–574 implementation, 576–577 performance measurement, 575–576 value stream reporting, 574–575 lean control system, 575 lean enterprise system, at Ford, 564 lean manufacturing, 562, 563–571 implementation of, 576–577 pursuit of perfection, 569–571 systems, 563 value flow, 566–568 by product, 564 pull, 568–569 value stream, 564–566 mapping, 566 lean thinking, principles of, 564 learning and growth (infrastructure) perspective, 478–479 summary of objectives and measures, 479 learning curve, 69 model, cumulative average-time, 69–71 and nonlinear cost behavior, 69–71 learning rate, 69 least squares method, of separating mixed costs, 61–63, 67 ledger costs, unbundling, 101 legal fees, as administrative costs, 30 legal system, pricing and, 674–676 LEV, see efficiency variance; labor efficiency variance (LEV) leverage, operating, 607–608, 609 life cycle consumable, 391 costs, 389 management, 389–395, 391 marketing product, 391 product, 389 viewpoint, consumable, 390–391 limitations JIT, 771–772 of profit measurement, 690–691 linear function, regression model for, 63 linear programming, 773–776 model, 774–776 line deviations, 62 linkages assumed, 34 customer, exploiting, 386–389 external, 380 internal, 380, 382–384 profit-linked productivity management, 539–540, 540 supplier, exploiting, 384–386 value-chain, 379 local information, access as reason for decentralization, 338 logistics industry, 767 long-range quality performance report, 511 long run, 54 long term contracts, JIT and, 767–768 targets in, 482 long-wave, of value creation, 476 loose constraints, 772 losses, noncash expenses as, 728 M MACRS, see modified accelerated cost recovery system (MACRS) maintenance cost equation, 223 make-or-buy analysis, functional-based, 641–642, 642 make-or-buy decisions, 575, 639 management accounting information uses by, 18–19 activity-based, 429–448 central, focusing of, 338 cost, 299 customer service, 387 by exception, 276 information for, 254 inventory just-in-case, 761–766 just-in-time, 766–772 life-cycle, 389–395 quality, 571 risk, 473 management accountant, role of, 10–12 management advisory services (MAS), 214 manager(s) performance evaluation of, 216 rewards controlling costs, 35 performance, 346–349 820 Subject Index segment motivation of, 338 training and evaluation of, 338 separating evaluation from division, 346 managerial decisions, cost information for, managerial judgment, 71–72 managerial performance, 216 budgets used for judging, 275 report, quarterly production, 270 managerial rewards, goal congruence and, 347–349 manual and automated systems accounting, job-order cost sheet in, 138 differences between, 609, 732–733 manufacturing computer-integrated, costs, 42, 134–135 cost flows summary, 147 total, 31–32 cycle time, 476–477 environment, advances in, 8–9 excellence of, 10 flexible, 733–734 JIT, 399, 771 just-in-time, 395–398 lean, 562, 563–571, 576 manufacturing cells, 397, 564, 566–568, 568, 570, 575 for JIT manufacturing, 173, 397, 399 manufacturing cycle efficiency (MCE), 477 manufacturing firm(s) batch production in hybrid, 187 importance of unit costs to, 135 income statement, 30, 31 producing and support departments in, 210, 211 vs service firms, 131 manufacturing firms, 26 manufacturing overhead, 28 mapping, value stream, 566 margin, 340 contribution, revenue equal to variable cost plus, 595 turnover and, 340 margin of safety, 607 market, perfectly competitive, 670 market-based transfer pricing, 350 marketing, pricing policies and, 673 marketing (selling) costs, 29 as nonproduction costs, 29 marketing department price and projected sales, 337 pricing and, 673 marketing expense budget, 258 marketing product life cycles, 391 marketing viewpoint, of product life cycle, 389, 390 market price, 350–351 market research method, for assessing effects of poor quality, 500 market share, 482, 689 and market size variances, 689–690 market size, 689 variances, 689–690 market structure basic types, characteristics of, 670, 671 and price, 670, 671 markup, 671–673 pricing and, 673 MAS, see management advisory services (MAS) master budget, 250–251 components, 251 flexible budgets for planning and control, 267 and interrelationships, 250 shortcomings of traditional process, 265–267 materials direct, 28–29 budget for, 255–256 mix and yield variances, 318–319 variance analysis and accounting, 301–308 direct costs and units of production, 135 requisitions, 139, 188 form, 139, 188 standard bill of, 303 matrix approach, to value stream identification, 565 maturity stage, 389, 392 maximum transfer price, 350 MCE, see manufacturing cycle efficiency (MCE) measurement changes in activity and process efficiency, 541–546 costing, 138 costs, 36, 37, 38 and error costs, trade-off between, 37 of environmental costs, 511–515 of goodness of fit, 65 performance, 346–349 of production activity, 136 productivity, 533–546 partial, 534–536 process, activities and, 546 profile productivity, 537–539 profit, 676–681 limitations of, 690–691 profit-linked productivity, 10, 537, 539–540, 540 quality cost, 500 measures core, 44 customer, 475 financial, 472–474, 474 innovation process, 476 learning and growth perspective, 478–479 operational, 575 operations process, 476 performance, multiple measures, 346 process perspective, objectives, and, 475–478 strategy linked to, 480–482 measures and objectives, postsales service process, 478 merchandising firm, operating budget for, 260 methods, see also specific methods least squares, 61–63, 67 milking the firm, 277 minimum transfer price, 350, 351 mix and yield variances, materials and labor, 317–320 mixed cost behavior, 50, 53–54, 54 mixed costs, 53–54 separating into fixed and variable components, 58–64 high-low method, 59–60 least-squares method, 61–63 regression programs for, 63–64 scatterplot method, 60–61 mix variance, 318 direct labor, 319–320 direct materials, 318–319 MNC, see multinational corporation (MNC) model(s), see specific models modified accelerated cost recovery system (MACRS), 730 depreciation rates, 730, 730 modified cash flows with additional opportunity, 724 monetary incentives, 276 monopolistic competition, 670 monopoly, 670 motivation empowerment, alignment, and, 479 of segment managers, as reason for decentralization, 338 MPV, see direct materials, price variance (MPV) multinational corporation (MNC), 338 multinational firm measuring performance in, 346–347 transfer pricing and, 355–356 multiperiod service capacities, of organizations, 55 multiple internal binding constraints, 773–776 Subject Index multiple overhead rates, vs single overhead rates, 148–150 multiple performance measures, 277 multiple-periods quality trend report, 507–510, 509 multiple-product analysis, 598–601 multiple products, independent production of, 227 multiple regression, 66–69 for Anderson Company, 66–69, 68 defined, 67 mutually exclusive projects, 715 example of, 724–725 NPV vs IRR, 722–725 MUV, see direct materials, usage variance (MUV) myopic behavior, 277, 342 N negative incentives, 276 negotiated transfer prices, 350, 351–354, 357 advantages, 353–354 net income, 591 net present value (NPV), 719–721 cash flow and, 720 modified, with additional opportunity, 724 investing in advanced technology, 733–735 and IRR conflicting signals, 723 mutually exclusive projects, 722–725 and IRR analysis, cash flow pattern, 725 meaning of, 719 method, 719–721 weighted average cost of capital, 719 example illustrating, 720–721 net realizable value method, 231–232 new product development, new product value stream, 564 noncash compensation, 349 noncash expenses, examples of, 728 noncontrollable costs, 277 nondiscounting methods models, 716, 718 payback and accounting rate of return, 716–718 nonfinancial measures, 470 nonlinear cost behavior, and learning curve, 69–71 nonmanufacturing costs, accounting for, 148 nonmanufacturing firms, importance of unit costs to, 135 nonmonetary incentives, 276 nonnegativity constraints, 775 nonproduction costs, 27, 29–30 821 nonproductive capacity, 575 nonuniform application of productive inputs, 174–176 non-unit-based drivers, 91 activity, 34 non-unit-related overhead costs, 90–91 non-value-added ABM-classified activities as, 502 activities, 432–433, 542, 766 examples, 433 costs, 433, 434–436 trend reporting of, 436, 436–437 normal activity level, 136–137 normal costing, 133–134 system, 86, 134 normal cost of goods sold, 146 normal job-order costing system, 139 normal spoilage, 151 NPV, see net present value (NPV) O object, cost, 103 objective function, 774 objective measures, 470 objectives customer, 474–475, 475 financial, 472–474, 474 and measures customer perspective, 474–475, 475 innovation process, 476 learning and growth perspective, 478–479, 479 postsales service process, 478 process, 475–478 operations process, 476 observable quality costs, 500 observation, for data collection, 98 OLAP, see online analytic programs (OLAP) oligopoly, 670 online analytic programs (OLAP), 7–8 operating approach, lean manufacturing as, 563 operating assets, 340 operating budget, 250 for merchandising and service firms, 260 preparing, 253–260 operating cash flows computation of decomposition terms, 729 methods in which estimates differ, 733 operating costs, 42 operating expenses, 777 for service organization, 32 operating income, 340, 591 absorption-costing, 677 after-tax, 343–344 approach, 591–592 statement, 592 operating leverage, 607–608, 609 operation, cycle time of, 567–568 operational activities, 381, 382, 382 and drivers, 382 organizational activity relationships and, 382 operational control system activity-based, 35–36 as cost management system, 33 functional-based, 34 information system, operational cost drivers, 381 operational measures, 575, 777–778 operational model of accounting information system, summary, 39 of air-conditioning system, operational objectives, revenue growth and, 472 operational process system, 167–168, 168 operation costing, 187–190, 189 basics, 188–189 example, 189–190 operations process, 168, 475 opportunity cost, 715 approach, 350 optimal cost system ABM as, 36 functional-based system as, 36 optimal solution, 775, 777 order, timing of placement, 763 order-filling costs, 29 order fulfillment, 564 value stream, 564, 565 order-getting costs, 29 ordering costs, 761 minimizing, 762–763 organization, committed resources of, 55 organizational activities cost drivers and, 380, 380–381 operational activity relationship with, 382 organizational cost drivers, 380 orientation, customer, outcomes measures, 480 for objectives, 481 pay linked to, 479 outflows, in financial budgets, 251 output activity, 543 as cost object, 26 efficient production and, 10, 534 equivalent units of, 173–174 in FIFI method, 176 inputs for, 534 services as, 26 822 Subject Index tangible products as, 26 types of, 26 output efficiency, activity, process productivity, 543, 543–544 outsourcing, 639 outside contractors and, 213, 639 overall profit, 687 overapplied overhead, 88 overhead, 28 accounting for, 27, 143–144 variances, 315–316 activities and drivers, 683 applied departmental rates, 89–90 direct labor, 140 in plantwide rate approach, 87–88 underapplied and overapplied, 88 departmental costs and activity, 149 departmental rates and product costing, 225–226 direct labor standards and, 300 direct materials as, 28 per-unit cost, 88, 134 predetermined rate for, 135 two fixed variances, 311–315 variable, 34, 300 variance, analysis, 308–317 overhead application, departmental rates, 92–95 overhead assignment, to activities, 99–101 overhead budget, 257 overhead costs and activity, departmental, 92–95 conversion cost and, 29 in functional-based product costing, 86 non-unit-related, 90–91 per-unit, 88 traceability of, 399, 571–573 overhead rate(s) departmental, 210–211 and product costing, 92–95 plantwide, 92 predetermined, 86 single vs multiple, 148–150 unit-based, example illustrating failure of, 91–95 overhead variance(s), 88 accounting for, 315–316 to cost of goods sold, 147 disposition of, 88–89 graph of fixed, 315 spending fixed, 313, 313 variable, 311, 311 two fixed, four-variance analysis, 311–315 two variable, four-variance method, 309–311 overproduction, inventories and, 571 overtime, for direct labor, 29 P parameter(s), hypothesis test of cost parameters, 65 partial measures advantages of, 537 conclusions about, 537 disadvantages of, 537 partial productivity measurement, 534–537 and changes in productive efficiency, 536 defined, 535–536 and measuring changes in productive efficiency, 536 participative budgeting, 276–277 partners-in-profit relationships, with suppliers, 569 past costs, 636 pay, outcomes linked to, 478 payback, and accounting rate of return, nondiscounting methods, 716–718 penetration pricing, 673 perfection, pursuit of, 569–570 perfectly competitive market, 670 performance bonus money and, 483 delivery, improved, 778 drivers, 480 evaluating, 355, 447 feedback on, 250, 276 functional measures of, 35 improvement five-step method for, 778–782 in lean manufacturing, 563 incentive compensation for, 483 indicators, 480 of investment centers, measuring, 339–346 measurement and evaluation, 470–471 absorption-costing operating income as, 677 multiple measures of, 277–278, 346, 347 value stream, 575–576 measures, 480 performance drivers, 470 performance management system, strategic-based, 468 traditional, single-loop feedback in, 481–482 performance measurement and evaluation, 216, 217, 218, 355 measures, 472 compared, 446, 447, 469 establishing, 446–447 performance report, 11, 11 activity-based, 272, 439–440, 440 actual vs flexible, 269 interim quality, 507, 508 managerial, 270 quality, 507–511 long-range, 511 quality standard and, 505 quarterly production costs, 268 total budget variances, 301 period costs, 29 perishability, 26 perquisites, 349 personal computers (PCs), 7, personal property, depreciable assets as, 729 perspective customer, objectives and measures, 474–475, 476 learning and growth, objectives and measures, 478–479 process, objectives and measures, 475–477 per-unit overhead cost, 88, 132 physical flow analysis, 177 for calculation of equivalent units, 186 for computation of unit costs, 186 for FIFO costing method, 177 for operation costing, 188–189, 189 schedule, 177, 177 for transferred-in-goods, 185 for valuation of inventories, 186–187 for weighted average costing method, 181, 182 physical standards, 506–507 physical units method, 228–229 planning, 10 CVP analysis for, 590 by management accountant, 10–11 planning and control budgeting for, 249–278 flexible, 267–272 and standard costing, 299 plant layout, in JIT manufacturing, 397–398, 770 plantwide rates limitations of, 90–96 overhead, 87–88, 92 policies, pricing, 671–674 pollution, 511–512 prevention technology, investment in, 732 positioning, strategic, 377 positive incentives, 276 postaudit, 733 postpurchase costs, 377, 474 postsales process, 475 service, objectives and measures, 478 power cost equation, 223 practical activity level, 137 Subject Index practical capacity, 55, 214–215, 314 impact of, 108 predatory pricing, 673, 674 predetermined rates conversion, 188 overhead, 86 preparation, of operating budget, 253–260 present value, 738–739 concepts, 737–739 future value, 737 present value, 737–739 tables, 718, 740, 741 of uneven series of cash flows, 738, 739 of uniform series of cash flows, 738–739, 739 prevention activities, environmental, 513 prevention costs, 499, 499 environmental, 512 price(s) direct materials, calculating, 301–304 discrimination, 674–676 laws, 646 increases, JIT purchasing vs holding inventories, 771 lower, 777–778 market, 350–351 market structure and, 670, 671 sales and price volume, variances, 687–688 standards, 298 target costing and, 673 and usage variances for direct materials, 304 price correction, 389 price-recovery component, 540–541 price skimming, 673 price (rate) variance, 301–302, 302 direct materials, using formulas to compute, 302–303 to evaluate purchasing, 307 timing of computation, 303 price volume variance, 689 pricing, 670 cost-based, 671–672 legal system and, 674–676 markup in, 671–673 policies, 671–674 and profitability analysis, 669–691 strategic, 503 target costing and, 673–674 pricing and revenue optimization (PRO) software, 609 pricing decisions, assigning traceable costs for, 27 primary activity, 97 rates, 103 and secondary activity costs, 101–102, 102 prime costs, 29, 34 823 prior-period costs, 171 process, 168 and activity efficiency, measuring changes in, 541–546 improvement, 446 innovation (business reengineering), 446 machines with identical functions, 397 postsales service, objectives and measures, 478, 478 tactical decision making, 633–635 process acceptance, 499 process costing with ending work-in-process inventories, 173–175 no beginning or ending work-inprocess inventories, 172–173 output of period in, 173 principle, 172 process-costing system, 137 basic features of, 171 cost flows in, 168–170 ERP software in, 171 JIT effect on, 400 production report in, 170 unit costs in, 170–171 process creation, 446 process design, 392 processing, costs, relevance, 648 process perspective, objectives, and measures, 475–478 in assigning responsibility, 445 process procedures, 188 process productivity activity output efficiency, 543 analysis, 543–544 measurement, activities and, 546 model, 544, 544–546 example, 544–545 process reliability, shutdown and, JIT approach to avoidance of, 768–771 process system approach, product and service costing, 167–191 process value analysis (PVA), 431–434, 571 process value chain, 475 process view, 35, 35 procurement costs, managing, 385 producers, of tangible products, 26 producing departments, 210 accountability for performance, 216 allocation to, 210, 212–213, 224 product(s) costing, 572 bottleneck process and, 578 costs, conversion char t, 579 diversity of, 91 higher-quality, 777 joint, 647 overhead assigned to, 89–90 reworking, 385 unique vs standardized, 131–132 value by, 564 value stream costing, with multiple products, 573–574 product acceptance, 499 product costing, 217, 299 in activity-based system, 35 assignment, traditional vs JIT manufacturing, 400 budgeted data for, single- and dualrate methods, 217 definitions for, 27, 42 departmental overhead rates and, 92–95, 225–226 functional-based, 86–90 methods of, 95 objective, of functional-based cost accounting system, 34 product costs, 26–30 definitions, examples of, 28 direct labor and, 149–150 and external financial reporting, 27–30 management decision errors and, product designs, 392 competing, cost analysis of, 394 product development, new, product diversity, 91 consumption ratios, 94 product functionality, 393 production, see also specific production issues accounting for joint processes, 226–232 characteristics of job-order system, 130–132 data, 149 data summary, 351 department, as cost center, 337 kanban, 768–771 overhead and, 86 overproduction, 571 rate, 568 timing of setting up, 763 production accounts, allocation to, 88–89 production activity, measuring, 136 production budget, 255, 255 flexible, 269 production costing internal value chain and, 382 process-costing systems basic operational and cost concepts, 167–171 with ending work-in-process inventories, 173–176 FIFO costing method, 176–180 with no beginning or ending work-in-process inventories, 172–173 operation costing, 187–190 824 Subject Index treatment of transferred-in goods, 184–187 weighted average costing method, 180–184 production costs, 27 linear function of, 33–34 types direct labor, 27 direct materials, 27 overhead, 27 production manager and direct labor variances, 307 and direct materials variances, 307 production process(es), joint, accounting for, 226–232 production report, 170, 175 FIFO costing method, 180 in process-costing systems, 170 cost of, illustrated, 174 weighted average costing method, 183, 183 production viewpoint of marketing life cycle, 389–390, 390 product life cycle, 389–391 productive capacity, 575 productive efficiency, 534 productive inputs, nonuniform application of, 174–176 productivity, 534 activity output efficiency, 543 improvement, programs, 534 labor, measure, 575 partial, measurement, 534–537 productivity measurement, 533–546 and control, 533–546 defined, 534 partial, 534–537 profile, 537–539 profile analysis no trade-offs, 538 with trade-offs, 538 profit-linked, 10, 537, 539–540, 540 product level activities, drivers, 381 product life cycle, 389 general pattern, 390 production viewpoint, 389–390, 390 time and, 10 viewpoints, 389–391 product line new, 576 profit by, 681–685 product mix decisions assigning traceable costs for, 27 constrained optimization and, 772 profile analysis, productivity measurement, 542 with and without trade-offs, 538 profile productivity measurement, 537–539 profit assets employed, ROI, and, 340 break-even point and, 591 of convenience stores, 645 costs and, 24 divisional, 684–685 fixed cost impact on, 597 job-order costing and, 137–138 measuring, 676–681 absorption-costing approach to, 676–679 limitations of, 690–691 variable-costing approach to, 679–681 overall, 687 by product line, 681–685 short-term, 645 profitability customer, 388, 685–687 measuring, NPV, 719, 724 of segments, 681–687 sources of, customer, 387 of value stream, 575 profitability analysis, pricing and, 669–691 profit and loss statement, 574 profit center, 337 profit-linkage rule, 539 profit-linked productivity measurement, 10, 537, 539–540, 540, 542, 545 price-recovery component, 540–541 profit-related variances, analysis of, 687–690 profit targets, 593–594, 598 after-tax, 594 profit-volume graph, 601–603, 602 pro forma income statement, 250–251 programming, linear, 773–775 progress, of quality improvement programs, 498 projections, forecasting and, 715–716 propriety of use transfer prices, 355 prospective measurement, 534 pseudoparticipation, 277 pull system, 568, 766–767 pull value, 568–569 purchasing activity, step-cost behavior, 385 just-in-time, 395–398, 771 purchasing agent, and direct materials variances, 307 push system, 568 push-through system, 396 PVA, see process value analysis (PVA) Q qualitative factors, 635 quality, 17 activity performance and, 434 cost management, activity-based, 501–502 costs of, 498–502 defining, 498–499 measurement, 500 environmental cost management and, 497–515 improving, 498 quality cost(s) activity-based management, role of, 501–502 categories, 499, 499 relative contribution graphs, 501 controlling, 505–511 defining, 498–503 individual, multiple-period trend graph, 509 measurement, 500 reporting, 500, 501 total quality, multiple-period trend graph, 509 quality cost information and decision making, 502–505 certifying quality through ISO 9000, 505 decision-making contexts cost-volume profit analysis and strategic design decisions, 504 strategic pricing, 503 quality cost management, 570 quality improvement, incentives for, 510–511 quality performance report, 507–511 incentives for improvement, 510–511 interim, 507, 508 long-range, 510, 511 multiple-period trend, 507–510 quality standard choosing, 506–507 interim, 506–507 physical, 506–507 quantifying, 506 total quality approach, 506 traditional approach, 506 quantity discounts, 675 quantity standards, 298 questionnaires, for data collection, 98–99 R radio frequency identification (RFID) tags, 771 rate(s) charging dual, 214–216 single, 213–214 of cost drivers, 107 departmental, 92–95 discount, 735–736 fixed, 215 predetermined conversion, 188 overhead, 86 Subject Index production, 568 variable, 215 rate of return accounting, 718 internal (IRR), 719, 721–722 and payback, nondiscounting methods, 716–718 rate variance, 301–302 ratio consumption, 91, 94 contribution margin, 595–596 cost, variable, 595 productivity, 535 recessions, of 1990-1991 and 2001, 276 reciprocal allocation method, 223–224 comparison of, 225, 225 illustrated, 224 reduced ABC systems, with approximate ABC assignments, 105 reduction, activity, 434 regression multiple, 66–69 programs for, 63–64 regression model for linear function, 63 reliability of cost formulas and, 64 relative market value, allocation based on, 230–232 relative proportions, of inputs, 534 relevancy, cost behavior, and activity resource usage model, 637–638 relevant costs (revenues), 636–637 comparing and relating to strategic goals, 634 relevant range, for fixed costs, 51 reliability of cost formulas, 64–66 delivery, 475 reorder point, EOQ and, illustrated, 763, 764, 764 replenishment, continuous, 768 report(s), see performance report; reporting; specific types reporting cost, 107–108 environmental, 512–513, 514 quality, 500, 501 value- and non-value-added costs, 434–436, 436 external financial, product costs and, 27–30 production, 175 value stream, 574 required rate of return, 719 requisition form, materials, 139, 139, 188 resale price method, 356 research and development (R&D) costs, nonproduction, 29 expense budget, 258–259 825 residual income, 342–343 advantages of, 342–343 disadvantages of, 343 resource(s) activities, cost behavior, and, 55–58 allocation, 484 capacity of, 106–107 committed, 55–56, 637–638 demand and supply, 58, 638, 639 drivers, 100 efficiency component (activity productivity), 545 flexible, 55, 439, 637 inputs, 545 overhead, 99–101 scarce, 773 spending, 640 usage, 640 usage model, and tactical decision making, 632–649 waste of, 570 responsibility, assigning, 445–446, 469, 469 responsibility accounting, 336–337, 468 activity-based, vs strategic-based, 468–471 decentralization, 337–339 financial-based vs activity-based, 444–448 model, 445 responsibility center, 337, 445 results orientation, of master budget, 266–267 return on investment (ROI), 339–342 advantages of, 340 comparison of divisional, 341 defined, 340 disadvantages of, 341–342 divisional, 347 revenue(s) center, 337 enhancement, 392 equal to variable cost plus contribution margin, 595 growth, 472 incentives and, 482–483 and relevant costs, 636–637 rewards assigning, 447–448, 471 compared, 448, 471 managerial cash compensation, 348 income-based compensation issues, 348–349 noncash compensation, 349 stock-based compensation, 348 per formance of managers, 346–349 risk management, 473 operating leverage and, 607 and uncertainty, introducing, 607–608 Robinson-Patman Act, 674–675 ROI, see return on investment rolling budget, 252 ropes, 779, 780, 781 S safety, margin of, 607 safety stock, 764 salaries, as administrative costs, 30 sales computer data management for, 254 data summary, 351 forecasting, 252 mix, 599 and CVP analysis, 599–601 variance, 689 price and price volume, variances, 687–688 tax effects of, 727 variance, total (overall), 688 sales and marketing value stream, 564 sales budget, 254, 254 sales dollars approach, 601 break-even point in, 595–598 sales forecast, in budget process, 276–277 sales revenue approach, 596 targeted income as percentage of, 593–594 sales value, hypothetical, 231 sales-value-at-split-off method, 230–231 salvage value, 735 Sarbanes-Oxley Act (2002), 12 scarce resources, 773 scattergraph, 60 for Anderson Company, 61 scatterplot method, of separating mixed costs, 60–61, 61 schedule of cash receipts, 264 cost of goods sold, 32 scheduling, upstream, 779 SEC, see Securities and Exchange Commission (SEC) second alternative, effects of, 605, 605 secondary activity, 97–98 costs, assigning to primary activities, 101–102, 102 second-stage allocation, 210–211 Securities and Exchange Commission (SEC), segment(s), customer, 686–687 segment profit, 681–687 activity-based costing measurement, 683–684 variable costing to measure, 682–683 sell or process further, 648 826 Subject Index sensitivity analysis, 608–609, 735 and CVP, 608–609 separable costs, 227 sequential allocation method, 220–223, 222, 225 illustrated, 223 service(s), 26 as output, 26 unique vs standardized, 131–132 service and product costing, process systems approach, 167–191 service firm lean thinking in, 576 vs manufacturing firm, 131 operating budget for, 260 producing and support departments in, 210, 211 service industry, growth of, service organization, 26, 172 income statement, 32 service process, postsales, objectives and measures, 478, 478 setup(s) and carrying costs, JIT approach, 767–768 costs, 761 inventory management, 568, 777 example involving, 765 pull value and, 568 time reduction for, 566 kanban, 770 seven-year assets, 729 SH, see standard hours (SH) shadow prices, 781 shared services centers (SSCs), 216 shareholders, 470 sharing, activity, 434 short run, 54 tactical decisions in, 633 short term profits, 645 targets in, 482 short-wave, of value creation, 476 shutdown and process reliability, JIT approach to avoidance of, 768–771 simplex method, 779 single charging rate, 213–214 single-loop feedback, 481–482 single methods, vs dual-rate methods actual data for performance evaluation, 216–217, 218 budgeted data for product costing, 216–217, 217 single overhead rates, 148–150 single-product setting, break-even point and, 598 slope parameter, 59 small-scale actions, tactical decisions as, 633 software for measuring profitability, 686 spreadsheet, 63 solution feasible, 777 graphical, 775–776 optimal, 777 source document, 133 special-order cost analysis, 649 decisions, 646–647, 647 spending, resource, 640 spending variance fixed overhead, 313, 313 variable overhead, 309–310 split-off point, 226, 227, 647–648 spoilage, in traditional job order system, accounting for, 150–151 spoiled units, 191–193 spreadsheet illustration of format, 729 regression program, 63 SQ, see standard quantity of materials allowed SSCs, see shared services centers (SSCs) stages, of product life cycle, 389 standard(s), 472 and activity-based costing, 298 control and, 250 of ethical conduct for management accountants, 12 interim quality, 507 ISO 9000, 505, 505 kaizen, 298, 437–438 quality, 505, 506–507 choosing, 506–507 interim, 507 physical, 506–507 realistic, 277 unit input, 298–299 value-added, 435 standard bill of materials, 303, 303 standard cost per unit, 299 sheet, 299–301, 300 standard costing systems functional-based control approach, 297–320 usage of, 298–299 standard error, 66 standard hours (SH) allowed, 300 computing, 300–301 standardized vs unique products and services, 131–132 standard quantity of materials allowed, 300 standard variable overhead rate, 309, 310 statement(s) of cost of goods manufactured, 31, 146 sold, 31, 147 income, 591 budgeted, 259–260 static budget, 266 vs flexible budget, 267–272 step-cost behavior, 56, 56 purchasing activity, 385 step-cost function, 56 step-fixed costs, 57–58 step-variable costs, 56–57 stock option, 348 stock-out costs, 761 avoiding, 763 straight-line depreciation method, 730 strategic alignment, 482–484 communication of strategy, 482 resource allocation, 484 targets and incentives, 482–483 strategic-based accounting vs activity-based responsibility accounting, 444–445, 469 responsibility, vs strategic-based responsibility, 468–471 strategic-based control, 467–484 strategic-based systems, responsibility accounting, vs activity-based responsibility accounting, 468–471 strategic cost management, 376–403 basic concepts, 377–381 strategic decision making, 377 strategic decisions, design, cost-volumeprofit analysis and, 504 strategic goals, relevant cost comparison and relationship with, 634 strategic issues feedback, 481–482 implications, conventional CVP vs ABC analysis, 611–612 strategic positioning, 378 competitive advantage and, 377–381 cost management role in, 378 customers and, 386–389 strategic pricing, 503 strategic profitability analysis, assigning traceable costs for, 27 strategy, 378 communicating, 482 linking measures to, 480–482 testable, 480, 481 translating, 472 strategy map, testable strategy illustrated, 481 strategy translation, 472 process, 473 structural activities, 380, 380 structure, market, and price, 670, 671 subjective measures, 470 Subject Index subsystems, of accounting information system, 5–6, sunk cost, 636 suppliers costing, 387, 388 data for example, 386 Internet impact on, 57 JIT and, 397 linkages, 380, 384–386 partners-in-profit relationships with, 569 supplies, overhead and, 28 supply and demand, of resources, 58, 638, 639 pricing and, 671 supply chain management, support department, 210 accountability for performance, 216 cost allocation, 209–232 method, 219–225, 221, 225 direct method, 219, 220, 221 sequential, 220–223, 222, 223 outside contractors and, 213 overhead costs, 211 total cost of, 223–224 support services, for JIT, 398 surveys, for data collection, 98–99 system(s), 3–4, 34, 37, see also activitybased costing (ABC) system; specific systems accounting information, 4–6 actual cost, 133–134 air-conditioning, operational model of, cost accounting, 5–6, 132–137 cost management systems activity-based, 33, 34–36 information, 5–6 enterprise resource planning (ERP), functional-based, 33–34 improvement of, 782 job-order costing, 130–132, 137–141 lean manufacturing, 563 operational control activity-based, 35–36 functional-based, 34 information, reducing size and complexity of, 103–108 time-driven ABC systems, 106–108 variable-costing system, 50–51 systems planning, 442–444 T tactical cost analysis, 634 tactical decision making, 633–635 activity resource usage model and, 632–649 illustrative examples of, 638–649 process, 633–634, 635 827 tangible products, 26 target(s), 472 and incentives, 482–483 profit, 593–594, 598 after-tax, 594 and weighting scheme illustrated, 483 target costing, 9, 393–394, 673 model, 395 and pricing, 673–674 role of, 393–395 targeted operating income as dollar amount, 593 as percentage of sales revenue, 593–594 target value, for quality, 498 taxation depreciation methods and, 730–731 income, 355, 356–358 of MNCs, 356–358 tax effects on sales, 727 t distribution, table of selected values, 67 “tear down” analysis, 394 technical efficiency, 534 improving, 535 technology advanced, example of investing in, 733–735 capital investment and, 732–736 ERP systems and, 171 information, advances in, 7–8, 33 for information and management, 254 terminal value, 735 testable strategy, 480, 481 illustrated, strategy map, 481 theoretical activity level, 137 theory of constraints (TOC), 8, 760, 772, 776–782 third alternative, effects of, 605, 605–606 three-condition guideline, 432 three-variance analysis, 316–317, 317 three-year assets, 729 throughput, 777 limited by new constraint, 781–782 time activity performance and, 434 buffer, 779 communication response and, 338 as competitive element, 10, 17 horizon for cost behavior, 54 job time tickets, 139 product life cycle and, 10 reduced setup/changeover, 566 time-driven ABC systems, 106–108 cost report, 108 timing of direct materials usage variance computation, 303–304 or order placement and production setup, 763 of price variance computation, 303 total allocation, 215–216 total budget variance, 301 performance report, 301, 301 total cost allocation and, 210 manufacturing, overhead and, 89 of support departments, 223–224 total environmental quality model, 512 total preventive maintenance, 768 total process productivity, activity output efficiency and, 546 total product, 377 total productive efficiency, 534 total productivity measurement, 537–541 total quality approach, 506 costs, multiple-period trend graph, 509 total quality control (TQC), 384, 398 JIT approach, 768 in lean manufacturing, 570 total quality management (TQM), 10 total (overall) sales variance, 688 TQC, see total quality control (TQC) TQM, see total quality management (TQM) traceability, 25 of costs, 25, 26, 572 overhead, 399 of fixed expenses, 643 tracing direct, 25, 26 driver, 25 trade-off, between inventory carrying costs and setup costs, 766 traditional approach, vs JIT, 399 traditional job order system, accounting for spoilage in, 150–151 training and evaluation of segment managers, as reason for decentralization, 338 transaction drivers, 102 transfer prices, 349–358 cost-based, 354–355 illegality of abuses in, 357 impact on income, 349, 349–350 and income taxes paid, 355–358 maximum, 350 minimum, 350 and multinational firm, 355–358 propriety of use, 355 setting, 350–358 variable cost plus fixed fee, 355 transfer pricing problem, 350 transferred-in cost, 169 transferred-in goods cost data, 185 equivalent units of production, 186 physical flow analysis, 185 production report, 187 treatment of, 184–187 828 Subject Index translation process, strategy, 472, 473 trend graph, multiple-period, individual quality costs, 509 trend reporting multiple-period, quality, 509 of non-value-added costs, 436, 436–437 t statistic, 65, 66 turnover, 340 margin and, 340 two-dimensional activity-based management model, 430 two fixed overhead variances, 311–315 two variable overhead variances, 309–311 two-variance analysis, 316, 316–317 U uncertainty demand, and reordering, 764 in demand for supplier, 397 and risk, introducing, 606–608 underapplied overhead, 88 uneven cash flows IRR and, 722 present value of, 738, 739 unexpired costs, 24 unfavorable variance, 270 uniform cash flows example with, 721–722 present value of, 738–739, 739 unique vs standardized products and services, 131–132 unit(s) accounted for, in production report, 170 break-even point in, 591–594, 599 of decentralization, 339 in FIFI method, 176 unit-based drivers, 34, 86–87 unit-based overhead rates, example illustrating failure of, 91–95 unit cost(s) comparison of, 95 computation, 140–141, 172 activity rates, 95 departmental rates, 93 physical flow analysis, 186 manufacturing firms and, 135 nonmanufacturing firms and, 135 for partially completed unit, 171 in process-costing systems, 170–171 production of information, 135–136 work-in-process inventories and, 173 unit input standards, developing, 298–299 unit-level issues driver, 86, 87, 89, 381 product costing, 94–95 variable cost, 315 unit times, of activities, 107 unused activity expenses, 643–644 unused capacity, 55 upstream scheduling, 779 usage budgeted vs actual, 216–217 resource, 640 usage (efficiency) variance, 302, 302 calculating, 301–304 direct materials, 301–304 using formulas to compute, 302–303 V validity, of assumptions underlying strategy, 480 valuation of inventories FIFO costing method, 178–179 physical flow analysis, 186–187 weighted average costing method, 182 value of accelerated methods, 731 customer, 377, 474–475 present tables, 740, 741 of uneven series of cash flows, 738, 739 of uniform series of cash flows, 738–739, 739 by product, 564 salvage, 735 terminal, 735 value added ABM-classified activities as, 502 activities, 432, 542 costs, 432 economic, 343–346 standard, 435 with value stream mapping, 566 value- and non-value-added cost, 432–433 value- and non-value-added costs formulas for, 435 reporting of, 434–436, 436 value chain, 42, 379 analysis, 382–389 external linkages, 380 framework, linkages, activities, 379–380 industrial, 379, 384 internal linkages, 380, 382–383, 383 value content, identifying and assessing, 431–434 value creation long-wave of, 476 short-wave of, 476 value stream, 564–566 Box Scorecard, 575, 576 cost assignment, 572, 572 costing, with multiple products, 573–574, 577–579 costs, 572, 572, 573 decision making for, 574–575 defined, 564 limitations and problems, 572–573 mapping, 566 matrix approach to identifying, 565 order fulfillment, 564, 565 performance measurement, 575–576 reporting, 574 workers for, 571 variable(s) changes in CVP, 604–609 dependent, 59 forecasting, 252–253 independent, 59 variable bases, vs fixed bases, 218–219 variable budget, 268 variable cost(s), 51, 52–53, 591 behavior, 52–53, 53 manufacturing, 34 plus contribution margin, revenue equal to, 595 plus fixed fee transfer prices, 355 ratio, 595 variable costing, 679 and absorption, changes in inventory under, 680 approach to measuring profit, 679–681, 682 income statement, 679, 683 for segment profit measurement, 682–683 system, 50–51 variable overhead, 300 analysis, 309 efficiency variance, 310–311 spending variance, 309–310 by item, 310 variable rate, developing, 215 variance activity capacity, 441 analysis, two- and three-variance, 316, 316–317, 317 contribution margin, 688, 688–689 direct labor rate, accounting for, 306 Subject Index direct materials and direct labor, disposition of, 307–308 and labor, investigating, 306–307 direct materials price and usage, accounting for, 304 using formulas to compute, 302–303 direct materials usage price and, 304 timing of computation, 303–304 using formulas to compute, 302–303 efficiency, 300 fixed overhead, 311–315, 312 graphical representation of, 314–315, 315 spending, 313, 313 volume, 313–314 flexible budget, 268 market share and size, 689–690 overhead, 88–89 price (rate), 301–302 timing of computation, 303 price volume, 689 sales mix, 689 sales price, and price volume, 687–688 total (overall) sales, 688 two fixed overhead, 311–315 two variable overhead, 309–311 variance analysis and accounting, direct materials and direct labor, 301–308 for overhead costs, 308–317 two- and three-, 316–317, 317 829 velocity, 476 cycle time and, 476–477 vendor kanban, 769, 769 viewpoints interactive, 391–393 product life-cycle, 389–390, 390 volume-based drivers, 34 volume variance fixed overhead, 313–314 price, 689 W waste, 570 elimination, 568 JIT and, 172 lean manufacturing and, 571 identifying, with value stream analysis, 564 sources of, 569–570 weighted average costing method, 180–184 cost of capital, 345, 719 example, 720 defined, 181 FIFO compared with, 184 vs physical units method, 229–230 weighted cost of capital, computing, 719 weight factor, 229 what-if analysis, 735 withdrawal kanban, 769, 769, 770 work cells, see manufacturing cells workers, see employees work in process, 32 accounts comparison using, 170 traditional, 401 clarification of term, 171 work-in-process inventory, 89 beginning, 32, 172–173, 176 file, 138 process costing with ending, 173–176 with no beginning or ending, 172–173 work order, 188 Y yield variance, 318 direct labor, 319–320 direct materials, 318–319 Z zero-based budgeting, 266 zero defects, 498, 569 environment and, 512 standard, 506, 507 zero setup times, 569 This page intentionally left blank COMPANY A Aetna, Inc., 685 Amazon.com, 33, 57, 609 Apple Inc., 673 Arm & Hammer, 392 Armistead Insurance, 45 Armstrong World Industries, Inc., 339 Aspect Medical Systems, Inc., 563 AT&T, 396, 438 Autoliv, 563 Avnet, Inc., 388 B Bal Seal Engineering, 760 BankBoston, 686 Bank of America, 686 Barclays Bank, 388, 685 Bassett Furniture Industries, Inc., 134 Bausch & Lomb, 347 BellSouth, 388 Black & Decker, 396 Boeing Company, 563, 609, 782 BorgWarner, 396 Boston Scientific, 563 Briggs and Stratton, 345 Brigham and Women’s Hospital, 716 Burger King, 766 BZW Securities, 685–686 C Canadian Imperial Bank of Commerce, 686 Caterpillar, 45 Caterpillar Financial Services Corporation, 498 CDNow, 33 Chandler Engineering, 252 Chemical Bank, 446 Chevron, 438 Chrysler, 28, 396 Cisco, 355 INDEX Citicorp, 347 Coca-Cola Company, 7, 253, 343 Colorado Rockies, 260 ConocoPhillips, 379 Continental Airlines, 676 CSX Corporation, 349 D Dayton Technologies, 45 Deere, see John Deere Dell Computer, 563 Delta Air Lines, 28 Dow Chemical, 216 E H Harley-Davidson, 396, 609, 768 Hearth & Home Technologies, 563 Hershey Foods, 349 Hewlett-Packard, 10, 216, 349, 396, 673 Hughes Aircraft, 45 I IBM, 216 IBM Credit, 446 Indigo, Ltd., 132 Intel, 343, 396 International Paper, 538 Irving Pulp and Paper, 732 Eastman Kodak, 348–349 Elgin Sweeper Company, 71 Exxon Mobil, 379 F Federal Express, Federal-Mogul, 446 FedEx Corp., 714 Fiat Auto Argentina, 171 First Union Corporation, 388 Fleet Financial Group, 686 Fleming Co., 26 Ford Motor Company, 226, 388, 396, 564, 609 Frito-Lay, Inc., 339 G General Electric, 343, 347, 396 General Mills, 339, 670 General Motors, 396, 534, 590–591, 685 Gerber Products, 349 Gillette, 347 Grede Foundries, Inc., 502 J Jacksonville Naval Supply Center, 591 JD Edwards, 134 John Deere, 396 Johnson & Johnson, 72, 690 K Kellogg’s, 670 KFC, 339 Kraft, 136 L Land’s End, 32 Levi Strauss & Company, 609 Littelfuse, Inc., 563 Lockheed Martin, 563 M Manugistics Group, 609 Mars, Inc., Massachusetts General Hospital, 716 Maytag, 563 831 832 Company Index MDS Nordion, 566 Medtronic Xomed, 446 Mercedes-Benz U.S International, 397, 569, 771 Merck, 343 Mercury Marine, 396 Metropolitan Life Insurance Company, 37 Mobil, 483 Monsanto, 715, 733 Morton Salt, 675 Motorola, 396 Mott’s, 213 N Nabisco, 378 National Semiconductor, 45 Nestlé, 253 NUMMI, 772 O Oracle, 171, 355, 502 Oregon Cutting Systems, 396 P PepsiCo, 339 Philip Crosby Associates, 498 Pizza Hut, 339 PMG Systems, Inc., 686 Post Office, see U.S Postal Service Pottery Barn, 672 PPG Industries, 767 Priceline.com, 33 PricewaterhouseCoopers, 609 Procter & Gamble, 7, 347, 591, 767 Public Service Enterprise Group, 438 Q Quaker Oats, 670 Quebecor Printing, Inc (Mount Morris), 733 R Raytheon Missile Systems, 563 Revlon, 254 Robert Bosch Corporation, 502 Rockland Manufacturing, 782 S Sam’s Club, 340 SAS, 502 Schneider National Company, 767 Shionogi Pharmaceuticals, 438 Small Business Administration (SBA), 106 Smith Dairy, 299 Southwest Airlines, 591 Starbucks Coffee, 54 Steelcase, Inc., 563 Stillwater Designs, T Taco Bell, 131 Takata Seatbelts, Inc., 563 Talus Solutions, 609 Tandem Computers, Inc., 354 Tecnol Medical Products, 72 Tektronix, 45 Tele Danmark (TDC), 479 Tennant Company, 507 Tenneco, 276 Texas Instruments (TI), 266, 639 Texas Petrochemicals Corporation, 513 Thomson Corporation, 438 3M, 72 Tickets.com, 609 TI Group Automotive Systems, 563 Toyota, 357, 563 Toys “R” Us, 396 Tropicana, 339 Twentieth Century Fox, 355 Tyco, 349 U Union Carbide Corporation, 349 U.S Airways, 432 U.S Postal Service, 9, 670 United Way, 260 V Verizon, 439 Volkswagen (VW), 210 W Wachovia Corporation, 388 Wal-Mart, 340, 348, 396, 674, 767 Walt Disney Company, 591 Westinghouse Electric, 396, 500 Whirlpool, 29 X Xerox, 45, 349, 396 Y Yum! Brands, 339 ... Strategic Cost Management EXHI B IT 1 1-9 387 Supplier Costing Fielding Electronics X1Z Purchase cost: $10 × 40,000 $26 × 20 ,000 $ 12 × 5,000 $28 × 5,000 Reworking products: $20 0 × 800 $20 0 × 190 $20 0... Overhead Control 160,000 25 ,000 22 5,000 Combined with overhead: See next entry Conversion Cost Control Wages Payable Accounts Payable 25 0,000 25 ,000 22 5,000 No entry 21 0,000 15,000 15,000 Cost of... Total product costs Units produced Unit cost Postpurchase costs $10 × 50,000; $10 × 80,000 $28 × 25 ,000; $28 × 20 ,000 c $60 × 300; $60 × 20 0; $1,000 × 20 0; $1,000 × 100; $20 0 × 400; $20 0 × 75 *Rounded