Part 2 book “Horngren’s cost accounting - A managerial emphasis” has contents: Strategy, balanced scorecard, and strategic profitability analysis, pricing decisions and cost management, process costing, capital budgeting and cost analysis, performance measurement, compensation, and multinational considerations,… and other contents.
www.downloadslide.net 13 Pricing Decisions and Cost Management Learning Objectives Discuss the three major factors that affect pricing decisions Understand how companies make long-run pricing decisions Price products using the targetcosting approach Apply the concepts of cost incurrence and locked-in costs Price products using the cost-plus approach Use life-cycle budgeting and costing when making pricing decisions Describe two pricing practices in which non-cost factors are important Explain the effects of antitrust laws on pricing Most companies carefully analyze their input costs and the prices of their products They know if the price is too high, customers will go to competitors; if the price is too low, the company won’t be able to cover the cost of making the product A company must also know how its customers will react to particular pricing strategies Understanding these factors has been a key factor in IKEA’s success ExtrEmE Pricing and cost managEmEnt at iKEa1 IKEA is a global furniture retailing industry phenomenon Known for products named after Swedish towns, modern design, flat packaging, and do-it-yourself instructions, IKEA has grown into the world’s largest furniture retailer with 343 stores worldwide How did this happen? Through aggressive pricing, coupled with relentless cost management When IKEA decides to create a new product, product developers survey competitors to determine how much they charge for similar items and then select a target price that is 30% to 50% lower than competitors’ prices With a product and price established, IKEA determines the materials to be used and selects one of its 1,800 suppliers to manufacture the item through a competitive-bidding process It also identifies cost efficiencies throughout design and production All IKEA products are shipped unassembled in flat packages, because shipping costs are at least six times greater if products are assembled before shipping IKEA applies the same cost management techniques to existing products For example, one of IKEA’s best-selling products, the Lack bedside table, has retailed for the same low price since 1981 despite increases in raw material prices and wage rates Since hitting store shelves, more than 100 technical development projects have been performed on the Lack table to reduce product and distribution costs and maintain profitability Steve Allen/Allen Creative/Alamy Stock Photo 524 Sources: Lisa Margonelli, “How IKEA Designs Its Sexy Price Tags,” Business 2.0, October 2002; Daniel Terdiman, “Anatomy of an IKEA Product,” CNET News.com, April 19, 2008 (http://news.cnet.com/8301-13772_3-992331552.html), accessed June 2013; and Anna Ringstrom, “Ikea Founder to Leave Board,” The New York Times, June 5, 2013; IKEA Annual Report, 2015 www.downloadslide.net As founder Ingvar Kamprad once summarized, “Waste of resources is a mortal sin at IKEA Expensive solutions are a sign of mediocrity, and an idea without a price tag is never acceptable.” Like IKEA, managers at many companies, such as Microsoft, Unilever, and Walmart, are strategic in their pricing decisions This chapter describes how managers evaluate demand at different prices and manage customers and costs across the value chain and over a product’s life cycle to achieve profitability Major Factors that Affect Pricing Decisions Consider for a moment how managers at Adidas might price their newest line of sneakers or how decision makers at Comcast would determine how much to charge for a monthly subscription for Internet service How managers price a product or a service ultimately depends on demand and supply Three influences on demand and supply are customers, competitors, and costs Customers Customers influence price through their effect on the demand for a product or service The demand is affected by factors such as the features of a product and its quality Managers always examine pricing decisions through the eyes of their customers and then manage costs to earn a profit Competitors No business operates in a vacuum Managers must always be aware of the actions of their competitors At one extreme, for companies such as Home Depot or Texas Instruments, alternative or substitute products of competitors hurt demand and cause them to lower prices At the other extreme, companies such as Apple and Porsche have distinctive products and limited competition and are free to set higher prices When there are competitors, managers try to learn about competitors’ technologies, plant capacities, and operating strategies to estimate competitors’ costs—valuable information when setting prices because it helps managers understand how low competitors are willing to go on price without making a loss Because competition spans international borders, fluctuations in exchange rates between different countries’ currencies affect costs and pricing decisions For example, if the yuan weakens against the U.S dollar, Chinese producers receive more yuan for each dollar of sales These producers can lower prices and still make a profit; Chinese products become cheaper for American consumers and, consequently, more competitive in U.S markets Costs Costs influence prices because they affect supply The lower the cost of producing a product, such as a Toyota Prius or a Nokia cell phone, the greater the quantity of product the company is willing to supply As companies increase supply, the cost of producing an additional unit initially declines but eventually increases Companies supply products as long as the revenue from selling additional units exceeds the cost of producing them Managers who understand the cost of producing products set prices that make the products attractive to customers while maximizing operating income Weighing Customers, Competitors, and Costs Surveys indicate that managers weigh customers, competitors, and costs differently when making pricing decisions At one extreme, companies operating in a perfectly competitive market sell very similar commodity products, such as wheat, rice, steel, and aluminum The managers at these companies have no control over setting prices and must accept the price determined by a market consisting of many participants Cost information helps managers decide the quantity of output to produce that will maximize operating income In less competitive markets, such as those for cameras, televisions, and cellular phones, products are differentiated, and all three factors affect prices: The value customers place on a Learning Objective Discuss the three major factors that affect pricing decisions customers, competitors, and costs www.downloadslide.net 526 Chapter 13 priCing DeCisions anD Cost ManageMent product and the prices charged for competing products affect demand, and the costs of producing and delivering the product affect supply As competition lessens even more, such as in microprocessors and operating software, the key factor affecting pricing decisions is the customer’s willingness to pay based on the value that customers place on the product or service, not costs or competitors In the extreme, there are monopolies A monopolist has no competitors and has much more leeway to set high prices Nevertheless, there are limits The higher the price a monopolist sets, the lower the demand for the monopolist’s product because customers will either seek substitute products or forgo buying the product DecisiOn Point What are the three major factors affecting pricing decisions? Costing and Pricing for the Long Run Learning Objective Understand how companies make long-run pricing decisions consider all future variable and fixed costs and earn a target return on investment Long-run pricing is a strategic decision designed to build long-run relationships with customers based on stable and predictable prices Managers prefer a stable price because it reduces the need for continuous monitoring of prices, improves planning, and builds long-run buyer–seller relationships McDonald’s maintains a stable price with its Dollar Menu of fast-food items, as does Apple, which always prices its new entry-level iPad at $499 But to charge a stable price and earn the target long-run return, managers must know and manage long-run costs of supplying products to customers, which includes all future direct and indirect costs Recall that indirect costs of a particular cost object are costs that are related to that cost object, but cannot be traced to it in an economically feasible (cost-effective) way These costs often comprise a large percentage of the overall costs assigned to cost objects such as products, customers, and distribution channels Consider cost-allocation issues at Astel Computers Astel manufactures two products: a high-end computer called Deskpoint and an Intel Core i5 chip–based laptop computer called Provalue The following figure illustrates six business functions in Astel’s value chain Research and Development Design of Products and Processes Production Marketing Distribution Customer Service Exhibit 13-1 illustrates four purposes of cost allocation Different sets of costs are appropriate for different purposes described in the exhibit When making pricing decisions for Deskpoint and Provalue, Astel’s managers allocate indirect costs from all six business functions Why? Because in the long run, it is only worthwhile to sell a product if the price customers are willing to pay for the product exceeds all costs incurred to produce and sell it while earning a reasonable return on invested capital Cost allocations and product profitability analyses affect the products promoted by a company To increase profits, managers focus on high-margin products They compensate salespersons based on product profitability, in addition to revenues, to motivate the sales staff to sell products that increase operating income and not just revenues Cost allocations also influence managers’ cost management decisions For example, identifying all costs of purchasing and ordering prompts Astel’s managers to design Provalue with fewer components to reduce these costs Cost allocations are sometimes used for cost reimbursements Astel’s contract to supply computers to the U.S government is based on costs plus a profit margin The cost reimbursement rules for the U.S government allow fully allocated manufacturing and design costs, but explicitly exclude marketing costs Inventory valuation for income and asset measurement requires costs to be allocated to calculate the cost of manufacturing inventory For this purpose, Astel allocates only manufacturing costs to products and no costs from other parts of the value chain such as R&D, marketing, or distribution Cost allocation is another example of the different costs for different purposes theme of the book We will discuss cost allocation in the next several chapters In this chapter, we focus on the role of cost allocation when making long-run pricing decisions based on costs incurred throughout the value chain www.downloadslide.net Costing anD priCing for the Long run Purpose Examples To provide information for economic decisions To decide on the selling price for a product or service To decide whether to add a new product feature To motivate managers and other employees To encourage the design of products that are simpler to manufacture or less costly to service To encourage sales representatives to emphasize high-margin products or services To justify costs or compute reimbursement amounts To cost products at a “fair” price, often required by law and government contracts To compute reimbursement for a consulting firm based on a percentage of the cost savings resulting from the implementation of its recommendations To measure income and assets To cost inventories for reporting to external parties To cost inventories for reporting to tax authorities Calculating Product Costs for Long-Run Pricing Decisions Astel’s market research indicates that the market for Provalue is becoming increasingly competitive Astel’s managers face an important decision about the price to charge for Provalue Managers first review data for the year just ended—2016 Astel has no beginning or ending inventory of Provalue and manufactures and sells 150,000 units during the year Astel uses activity-based costing (ABC) to allocate costs and calculate the manufacturing cost of Provalue Astel’s ABC system has: ■ ■ Three direct manufacturing costs: direct materials, direct manufacturing labor, and direct machining costs Three manufacturing overhead cost pools: ordering and receiving components, testing and inspection of final products, and rework (correcting and fixing errors and defects) Astel considers machining costs as a direct cost of Provalue because these machines are dedicated to manufacturing Provalue.2 Astel uses a long-run time horizon (one year) to price Provalue Over this horizon, Astel’s managers observe the following: ■ ■ ■ ■ Direct material costs vary with the number of units of Provalue produced Direct manufacturing labor costs vary with the number of direct manufacturing laborhours used Direct machining costs are fixed costs of leasing 300,000 machine-hours of capacity each year for multiple years These costs not vary with the number of machine-hours used each year Each unit of Provalue requires machine-hours In 2016, Astel uses the entire machining capacity to manufacture Provalue (2 machine@hours per unit * 150,000 units = 300,000 machine@hours) Ordering and receiving, testing and inspection, and rework costs vary with the quantity of their respective cost drivers For example, ordering and receiving costs vary with the number of orders In the long run, staff members responsible for placing orders can be reassigned or laid off if fewer orders need to be placed or increased if more orders need to be processed The following Excel spreadsheet summarizes manufacturing cost information to produce 150,000 units of Provalue in 2016 As described in Chapter 5, management accountants calculate the indirect cost per unit of the cost driver in column (6) by dividing Astel’s total costs in each cost pool by the total quantity of the cost driver for that cost pool (Calculations not shown.) Recall that Astel makes a high-end computer, Deskpoint, and a laptop computer, Provalue If Deskpoint and Provalue were manufactured using the same machines, Astel would have allocated machining costs on the basis of the budgeted machine-hours used to manufacture the two products and would have treated these costs as fixed manufacturing overhead costs Exhibit 13-1 Purposes of Cost Allocation 527 www.downloadslide.net 528 Chapter 13 priCing DeCisions anD Cost ManageMent A B C D E F G H Total Quantity of Cost Driver (5) = (3) × (4) Cost per Unit of Cost Driver (6) Manufacturing Cost Information to Produce 150,000 Units of Provalue Cost Driver Cost Category ( 1) ( 2) Direct Manufacturing Costs Direct materials No of kits Direct manufacturing labor (DML) DMLhours Direct machining (fixed) Machinehours Details of Cost Driver Quantities (3) (4) kit per unit 150,000 unit s 150,000 $460 3.2 DML-hours per unit 150,000 unit s 480,000 $ 20 300,000 $ 38 22,500 $ 80 4,500,000 $ 30,000 $ 40 Manufacturing Overhead Costs Ordering and No of 50 orders per receiving component orders 10 Testing and Testing30 testing-hours hours per unit 11 inspection 12 450 components 150,000 unit s Rework Reworkhours 13 2.5 rework-hours per defective unit 8% defect rate 12,000 a defective units 14 15 a 8% defect rate × 150,000 units = 12,000 defective units Exhibit 13-2 shows the total cost of manufacturing Provalue in 2016 of $102 million by various categories of direct costs and indirect costs The manufacturing cost per unit in Exhibit 13-2 is $680 Manufacturing, however, is just one business function in the value chain To set long-run prices, Astel’s managers must calculate the full cost of producing and selling Provalue by allocating costs in all functions of the value chain For each nonmanufacturing business function, Astel’s managers trace direct costs to products and allocate indirect costs using cost pools and cost drivers that measure cause-and-effect relationships (supporting calculations not shown) Exhibit 13-3 summarizes Provalue’s 2016 operating income and shows that Astel earned $15 million from Provalue, or $100 per unit sold in 2016 Alternative Long-Run Pricing Approaches How should managers at Astel use product cost information to price Provalue in 2017? Two different approaches for pricing decisions are Market-based Cost-based, which is also called cost-plus The market-based approach to pricing starts by asking, “Given what our customers want and how our competitors will react to what we do, what price should we charge?” Based on this price, managers control costs to earn a target return on investment The cost-based approach to pricing starts by asking, “Given what it costs us to make this product, what price should we charge that will recoup our costs and achieve a target return on investment?” Companies operating in competitive markets (for example, commodities such as steel, oil, and natural gas) use the market-based approach The products produced or services www.downloadslide.net Costing anD priCing for the Long run 529 Exhibit 13-2 A B C Total Manufacturing Costs for Manufacturing Cost per Unit 150,000 Units (1) (2) = (1) ÷ 150,000 Manufacturing Costs of Provalue for 2016 Using Activity-Based Costing Direct manufacturing costs Direct material costs (150,000 kits × $460 per kit) Direct manufacturing labor costs (480,000 DML-hours × $20 per hour) Direct machining costs (300,000 machine-hours × $38 per machine-hour) Direct manufacturing costs 10 11 12 $ 69,000,000 $ 460 9,600,000 64 11,400,000 90,000,000 76 600 1,800,000 12 9,000,000 60 1,200,000 12,000,000 $102,000,000 80 $ 680 13 14 Manufacturing overhead costs 15 16 17 18 19 20 21 22 Ordering and receiving costs (22,500 orders × $80 per order) Testing and inspection costs (4,500,000 testing-hours × $2 per hour) Rework costs (30,000 rework-hours × $40 per hour) Manufacturing overhead cost Total manufacturing costs Exhibit 13-3 A Revenues Costs of goods sold a (from Exhibit 13-2) B C Total Amounts for 150,000 Units (1) $150,000,000 Per Unit (2) = (1) ÷ 150,000 $1,000 102,000,000 680 2,400,000 3,000,000 15,000,000 9,000,000 3,600,000 33,000,000 135,000,000 $ 15,000,000 16 20 100 60 24 220 900 $ 100 b Operating costs 10 11 12 13 14 R&D costs Design costs of product and proces Marketing and administration costs Distribution costs Customer-service costs Operating costs Full cost of the product Operating income 15 a 16 Cost of goods sold = Total manufacturing costs because there is no beginning or ending inventory 17 of Provalue in 2016 b 18 Numbers for operating cost line-items are assumed without supporting calculations Profitability of Provalue Division for 2016 Using Value-Chain ActivityBased Costing www.downloadslide.net 530 Chapter 13 priCing DeCisions anD Cost ManageMent try it! 13-1 Gonzalo Inc is a small distributor of mechanical pencils Gonzalo identifies its three major activities and cost pools as ordering, receiving and storage, and shipping, and it reports the following details for 2016: Activity Placing and paying for orders of pencil packs Receiving and storage Shipping of pencil packs to retailers Cost Driver Number of orders Loads moved Number of shipments Quantity of Cost Driver 500 4,000 1,500 Cost per Unit of Cost Driver $100 per order $ 60 per load $ 80 per shipment For 2016, Gonzalo buys 250,000 pencil packs at an average cost of $6 per pack and sells them to retailers at an average price of $8 per pack Assume Gonzalo has no fixed costs and no inventories Calculate Gonzalo’s operating income for 2016 provided by one company are very similar to products produced or services provided by others Companies in these markets must accept the prices set by the market Companies operating in less competitive markets offer products or services that differ from each other (for example, automobiles, computers, management consulting, and legal services) and can use either the market-based or cost-based approach as the starting point for pricing decisions Some companies use the cost-based approach: They first look at costs because cost information is more easily available and then consider customers and competitors Other companies use the market-based approach: They first look at customers and competitors and then look at costs Both approaches consider customers, competitors, and costs Only their starting points differ Managers must always keep in mind market forces, regardless of which pricing approach they use For example, building contractors often bid on a cost-plus basis but then reduce their prices during negotiations to respond to other lower-cost bids Companies operating in markets that are not competitive (for example electric utilities) follow cost-based approaches That’s because these companies not need to respond or react to competitors’ prices The margin they add to costs to determine price depends on the ability and willingness of customers to pay for the product or service In many of these noncompetitive markets, though, regulators intervene to set prices to limit the profits that companies can earn We consider first the market-based approach DecisiOn Point How companies make long-run pricing decisions? Market-Based Approach: Target Costing for Target Pricing Learning Objective Price products using the target-costing approach target costing identifies an estimated price customers are willing to pay and then computes a target cost to earn the desired profit Market-based pricing starts with a target price, which is the estimated price for a product or service that potential customers are willing to pay Managers base this estimate on an understanding of customers’ perceived value for a product or service and how competitors will price competing products or services Managers need to understand customers and competitors for three reasons: Lower-cost competitors continually restrain prices Products have shorter lives, which leaves companies less time and opportunity to recover from pricing mistakes, loss of market share, and loss of profitability Customers are more knowledgeable because they have easy access to price and other information online and demand high-quality products at low prices Understanding Customers’ Perceived Value A company’s sales and marketing organization, through close contact and interaction with customers, identifies customer needs and perceptions of product value Companies also conduct market research on what customers want and the prices they are willing to pay www.downloadslide.net Market-BaseD approaCh: target Costing for target priCing Competitor Analysis To gauge how competitors might react to a prospective price, a manager must understand competitors’ technologies, products or services, costs, and financial conditions In general, the more distinctive a product or service, the higher the price a company can charge Where companies obtain information about their competitors? Usually from former customers, suppliers, and employees of competitors Some companies reverse-engineer—disassemble and analyze competitors’ products to determine product designs and materials and understand their technologies At no time should a manager resort to illegal or unethical means to obtain information about competitors For example, a manager should never bribe current employees or pose as a supplier or customer to obtain competitor information Implementing Target Pricing and Target Costing We use the Provalue example to illustrate the four steps in developing target prices and target costs Step 1: Develop a Product That Satisfies the Needs of Potential Customers Astel’s managers use customer feedback and information about competitors’ products to change product features and designs of Provalue in 2017 Their market research indicates that customers not value Provalue’s extra features, such as special audio elements and designs that make the PC run faster Instead, customers want Astel to redesign Provalue into a basic, reliable and low-priced PC Step 2: Choose a Target Price Competitors are expected to lower the prices of PCs to $850 Astel’s managers want to respond aggressively by reducing the price of Provalue by 20%, from $1,000 to $800 per unit At this lower price, the marketing manager forecasts an increase in annual sales from 150,000 to 200,000 units cOncepts in actiOn H&M Uses Target Pricing to Bring Fast Fashion to Stores Worldwide H&M is the worldwide leader in fast fashion, bringing trendy, affordable clothes from the runway to stores in a matter of weeks Famous for offering Alexander Wang–designed dresses for $4.95 and trench coats for $20, the Swedish-based company is now the world’s second-largest clothing retailer, with more than 3,900 stores across 61 countries and $25.3 billion in 2015 sales How did this happen? Aggressive target pricing, coupled with “cost-consciousness” across the company When H&M decides to produce an item, its 160 in-house designers set out to strike the right balance between fashion, quality, and price Concept teams of designers, buyers, pattern makers, and a controller work together to set a target price H&M outsources to suppliers throughout Europe and Asia to manufacture the item High-volume items Doug Houghton/Alamy Stock Photo such as basics and children’s wear are ordered far in advance to ensure volume-based cost efficiencies Trendy items in small quantities are produced at shorter notice Once produced, the items are shipped to H&M’s logistics centers for distribution to stores H&M stores carry no backup stocks Stores are replenished directly from the logistic centers, allowing stores to be restocked quickly with only the best-selling products H&M has incorporated sustainability into its target pricing and cost management practices Around 90% of H&M’s products are transported from suppliers to distribution centers via sea or rail to avoid fossil fuel–intensive air and road shipping Additionally, certified organic cotton and environmentally conscious materials, such as organic hemp and recycled wool, make up 14% of the company’s total material use Sources: Andrew Hoffman, et al., “H&M’s Global Supply Chain Management Sustainability: Factories and Fast Fashion,” University of Michigan Erb Institute No 1-429-373 (Ann Arbor, MI: University of Michigan, 2014); “Sales Development in 2015,” H&M AB press release (Stockholm, Sweden, December 15, 2015, http://about.hm.com/en/news/newsroom/news.html/en/financial-reports/2015/12/2065879.html); H&M AB, “From Idea to Store” (http://about.hm.com/en/About/Facts-About-HM/Idea-to-Store, accessed March 2016); Clara Lu, “Behind H&M’s Fashion Forward Retail Inventory Control,” TradeGecko blog, August 12, 2014 (https://www.tradegecko.com/blog/hm-retail-inventory-control) 531 www.downloadslide.net 532 Chapter 13 priCing DeCisions anD Cost ManageMent Step 3: Derive a Target Cost per Unit by Subtracting Target Operating Income per Unit from the Target Price Target operating income per unit is the operating income that a company aims to earn per unit of a product or service sold Target cost per unit is the estimated long-run cost per unit of a product or service that enables the company to achieve its target operating income per unit when selling at the target price.3 Target cost per unit is the target price minus target operating income per unit It is often lower than the existing full cost of the product Target cost per unit is really just that—a target—something the company must strive to achieve To earn the target return on capital, Astel needs to earn 10% target operating income per unit on the 200,000 units of Provalue it plans to sell Total target revenues Total target operating income Target operating income per unit Target cost per unit = = = = = Total current full costs of Provalue = Current full cost per unit of Provalue = DecisiOn Point How companies determine target costs? try it! $800 per unit * 200,000 units = $160,000,000 10% * $160,000,000 = $16,000,000 $16,000,000 , 200,000 units = $80 per unit Target price - Target operating income per unit $800 per unit - $80 per unit = $720 per unit $135,000,000 (from Exhibit 13-3) $135,000,000 , 150,000 units = $900 per unit Provalue’s $720 target cost per unit is $180 below its existing $900 unit cost To achieve the target cost, Astel must reduce costs in all parts of the value chain, from R&D to customer service Target costs include all future costs, variable costs as well as costs that are fixed in the short run, because in the long run a company’s prices and revenues must exceed its total costs if it is to remain in business In contrast, for short-run pricing or one-time-only special-order decisions, managers only consider costs that vary in the short run Step 4: Perform Value Engineering to Achieve Target Cost Value engineering is a systematic evaluation of all aspects of the value chain, with the objective of reducing costs and achieving a quality level that satisfies customers Value engineering entails improvements in product designs, changes in materials specifications, and modifications in process methods The Concepts in Action: H&M Uses Target Pricing to Bring Fast Fashion to Stores Worldwide describes H&M’s approach to target pricing and target costing 13-2 Gonzalo Inc is a small distributor of mechanical pencils Gonzalo identifies its three major activities and cost pools as ordering, receiving and storage, and shipping, and it reports the following details for 2016: Activity Placing and paying for orders of pencil packs Receiving and storage Shipping of pencil packs to retailers Cost Driver Number of orders Loads moved Number of shipments Quantity of Cost Driver 500 Cost per Unit of Cost Driver $100 per order 4,000 1,500 $ 60 per load $ 80 per shipment For 2016, Gonzalo buys 250,000 pencil packs at an average cost of $6 per pack and sells them to retailers at an average price of $8 per pack Assume Gonzalo has no fixed costs and no inventories For 2017, retailers are demanding a 5% discount off the 2016 price Gonzalo’s suppliers are only willing to give a 4% discount Gonzalo expects to sell the same quantity of pencil packs in 2017 as it did in 2016 If all other costs and cost-driver information remain the same, by how much must Gonzalo reduce its total cost and cost per unit if it is to earn the same target operating income in 2017 as it earned in 2016 (and thereby earn its required rate of return on investment)? For a more detailed discussion of target costing, see Shahid L Ansari, Jan E Bell, and the CAM-I Target Cost Core Group, Target Costing: The Next Frontier in Strategic Cost Management (Martinsville, IN: Mountain Valley Publishing, 2009) For implementation information, see Shahid L Ansari, Dan Swenson, and Jan E Bell, “A Template for Implementing Target Costing,” Cost Management (September–October 2006): 20–27 www.downloadslide.net VaLue engineering, Cost inCurrenCe, anD LoCkeD-in Costs 533 Value Engineering, Cost Incurrence, and Locked-in Costs To implement value engineering, managers distinguish value-added activities and costs from non-value-added activities and costs A value-added cost is a cost that, if eliminated, would reduce the actual or perceived value or utility (usefulness) customers experience from using the product or service In the Provalue example, value-added costs are specific product features and attributes desired by customers, such as reliability, adequate memory, preloaded software, clear images, and prompt customer service A non-value-added cost is a cost that, if eliminated, would not reduce the actual or perceived value or utility (usefulness) customers gain from using the product or service Examples of non-value-added costs are the costs of defective products and machine breakdowns Companies seek to minimize non-value-added costs because they not provide benefits to customers Activities and costs not always fall neatly into value-added or non-value-added categories, so managers often have to apply judgment to classify costs Several costs, such as supervision and production control, have both value-added and non-value-added components When in doubt, some managers prefer to classify costs as non-value-added to focus organizational attention on cost reduction The risk with this approach is that an organization may cut some costs that are value-adding, leading to poor customer experiences Despite these difficult gray areas, managers find it useful to distinguish value-added from non-value-added costs for value engineering In the Provalue example, direct materials, direct manufacturing labor, and direct machining costs are value-added costs; ordering, receiving, testing, and inspection costs have both value-added and non-value-added components; and rework costs are non-value-added costs Astel’s managers next distinguish cost incurrence from locked-in costs Cost incurrence describes when a resource is consumed (or benefit forgone) to meet a specific objective Costing systems measure cost incurrence For example, Astel recognizes direct material costs of Provalue only when Provalue is assembled and sold But Provalue’s direct material cost per unit is locked in, or designed in, much earlier, when product designers choose the specific components in Provalue Locked-in costs, or designed-in costs, are costs that have not yet been incurred, but will be incurred in the future based on decisions that have already been made The best opportunity to manage costs is before costs are locked in, so Astel’s managers model the effect of different product design choices on costs such as scrap and rework that will only be incurred later during manufacturing They then control these costs by making wise design choices Similarly, managers in the software industry reduce costly and difficult-to-fix errors that appear during coding and testing through better software design and analysis Exhibit 13-4 illustrates the locked-in cost curve and the cost-incurrence curve for Provalue The bottom curve uses information from Exhibit 13-3 to plot the cumulative cost per unit incurred in different business functions of the value chain The top curve plots cumulative locked-in costs (The specific numbers underlying this curve are not presented.) Total cumulative cost per unit for both curves is $900, but there is wide divergence between locked-in costs and costs incurred For example, product design decisions lock in more than 86% ($780 , $900) of the unit cost of Provalue (including costs of direct materials, ordering, testing, rework, distribution, and customer service), when Astel incurs only about 4% ($36 , 900) of the unit cost! Value-Chain Analysis and Cross-Functional Teams A cross-functional value-engineering team consisting of marketing managers, product designers, manufacturing engineers, purchasing managers, suppliers, dealers, and management accountants redesign Provalue—called Provalue II—to reduce costs while retaining features that customers value Some of the team’s ideas are: ■ ■ Use a simpler, more reliable motherboard without complex features to reduce manufacturing and repair costs Snap-fit rather than solder parts together to decrease direct manufacturing labor-hours and related costs Learning Objective Apply the concepts of cost incurrence when resources are consumed and locked-in costs when resources are committed to be incurred in the future www.downloadslide.net 958 INDEX Direct costs (continued) products, 164 quality, 751 specific cost, 31 total cost of products, 168 write-off approach, 131 Direct-costs inputs, 258–64 Direct-cost tracing, 159, 161 Direct engineered costs, 504 Direct labor costs, 47–48 Direct manufacturing costs, 41, 45 Direct manufacturing labor, 113–115, 118, 125 budget, 208–209 cash disbursements, 228 costs, 39, 43, 45 efficiency variance, 260, 262–63, 272 mix variance, 272–73 number of units manufactured, 251 price variance, 259, 262–63, 272 standard costs, 263 workers, 204 yield variance, 272, 273 Direct manufacturing labor-hours, 205, 210 Direct materials, 113, 204 cash disbursements for purchases, 228 efficiency variance, 260, 262–263 flexible-budget variances, 260 price variance, 259, 262–63 scrap used as, 735 standard costs, 263 Direct Materials Control account, 262, 705 Direct materials costs, 39, 41, 43–45 Direct materials-handling labor costs, 308–310 Direct materials inventory, 38, 41, 204 first-in, first-out (FIFO) method, 207 Direct materials purchases budget, 207–208 Direct materials usage budget, 207–208 Direct method, 613–14 Discounted cash flow analysis, 830–31 Discounted cash flow (DCF) method internal rate-of-return (IRR) method, 824–25 net present value (NPV) method, 823–24 required rate of return (RRR), 822–23 time value of money, 822 Discount rate, 823 Discretionary costs, 505 Discretionary overhead costs, 505 Distinctive objectives, 484–85 Distress prices, 866–67 Distribution, 5, 154–55 Distribution-channel cost pools, 574, 577 Distribution-channel costs, 562 Distribution channels costs, 570 Disturbance term, 403 Division administration cost pool, 574–75 Divisional organizations, 217 Division cost pools, 574 Division costs, 570, 573, 577–78 Division-sustaining costs, 562, 571 Dodd-Frank law (2010), 911 Downsizing, 504–506 Dropping customer, 448–49 Dual pricing, 871–72 Dual-rate method advantages and disadvantages, 606 allocation bases, 607–610 budgeted costs versus actual costs, 607–610 budgeted fixed-cost resources, 605 budgeted rates and actual usage, 608–609 budgeted rates and budgeted usage, 608 budgeted versus actual rates, 607–608 fixed-cost pool, 602–603 materials-handling services, 604 support department costs, 602–603 variable-cost pool, 602–603 Dumping, 545 Duplication of output, 860 DuPont method of profitability analysis, 894 Durbin-Watson statistic, 404–405 Dysfunctional decision making, 860 E Early warning, 218 Economic events, Economic-order-quantity decision model, 780–82 Economic order quantity (EOQ), 780, 786–87 Economic plausibility, 377, 380 Economic transactions, Economic value added (EVA), 897–98 Economy and ethics, 16 Efficiency, Efficiency variances, 256–64, 303 direct manufacturing labor, 272 Electronic Data Interchange (EDI) technology, 118 Employees bargaining power, 479 budgets motivating, 201 effectiveness, 266 efficiency, 266 moral hazard, 907–908 performance measurement, 266 Ending cash balance, 229 Ending inventories budget, 212–13 End-of-accounting-year adjustments, 128–33 Engineered costs, 504–505 Engineering and production control costs, 611–12 Enterprise resource planning (ERP) systems, budgeting, 215–16 just-in-time (JIT) production, 794–95 standard costs, 264 Environment, quality standards for, 749 Environmental, social, and governance (ESG) standards, 542 Environmental costs, 31, 542 Environmental performance, 489–93 Equipment book value, 451–52 Equipment-replacement decisions, 451–55 Equivalent products, 478 Equivalent units, 679–80 ERP See enterprise resource planning (ERP) systems Error term, 403 Ethics, 16–18 budgets, 222 challenges, 17–18 institutional support, 16 www.downloadslide.net INDEX Events, 92 Executive performance measures and compensation, 910–11 Expected monetary value, 93 Expected value, 93–94 Experience curve, 390–93 F Facility-sustaining costs, 163 Factory overhead costs, 39 Favorable variance, 251–52 Federal False Claims Act, 645 Federal Trade Commission Act, 544 Feedback, 218, 904 Finance director, 14 Financial accounting controller, 14 defined, Generally Accepted Accounting Principles (GAAP), not recording opportunity costs, 440 Financial budget, 203 Financial measurements, 908 Financial performance, 267, 313, 493, 892–93 Financial perspective, 487, 492, 892 Financial planning models, 215–16 Financial reporting capacity levels, 349–52 Financial variables for performance measurement, 341 Financing, 229 Finished Goods Control account, 130–31, 296, 301–302, 306, 350, 802 Finished-goods inventory, 38–39, 41, 43, 204 Finished-Goods inventory account, 132 First-in, first-out (FIFO) method, 204 First-in, first-out (FIFO) process-costing method, 687–90 spoilage, 725 transferred-in costs, 695–96 versus weighted-average process-costing method, 691–92 First-stage allocation, 161 Five-step decision-making process, 157–58 Fixed batch-level direct costs, 307–308 Fixed-cost allocation, 608–609 Fixed-cost components partial productivity measures, 511–12 Fixed-cost pool, 602–603 Fixed costs, 32–36, 69, 291–92 alternative structures, 82–83 budgeted fixed cost, 604 changes in operating income, 83–84 combined budgeted rate for, 603–604 cost driver, 35 cost objects, 375 cost-plus pricing, 538–39 labor costs, 33 production-volume variance, 298–300 relevant range, 35 resources, 33 variable costs, 32, 73 Fixed indirect costs, 112 Fixed manufacturing costs, 88–89, 335–37, 343 absorption costing, 332 difficulties forecasting, 353 variable costing, 332 959 Fixed manufacturing overhead costs, 350–351 Fixed Overhead Allocated account, 300 Fixed Overhead Control account, 300 Fixed overhead costs, 289 budgets, 210 journal entries, 300–302 standard costing, 306 Fixed overhead cost variances, 297–303 fixed overhead flexible-budget variance, 297 fixed overhead spending variance, 297 production-volume variance, 298–300 Fixed overhead flexible-budget variance, 297 Fixed overhead production-volume variance, 300 Fixed overhead spending variance, 297, 300–301 Fixed Overhead Spending Variance account, 301 Fixed overhead variance calculations, 303–305 Fixed setup overhead costs, 310–11 Flexible budget, 253 direct materials-handling labor costs, 308–310 fixed setup overhead costs, 310–11 Flexible-budget analysis, 292 Flexible-budget variances, 254–56, 260, 305, 580–81 efficiency variance, 256–58 price variance, 256–58 Flexible manufacturing systems (FMS), 159 Focal point, 484 Follow-up service calls, 484 Formal management control system, 857–58 For-profit companies, 493 4-variance analysis, 303 Full-cost bases, 867–69 Full cost of product cost base, 538 Full cost of the product, 430–31 Fully allocated costs, 578 Fully allocated customer profitability, 573–78 Functional organizations, 217 Future amount of $1, 927–28, 931 G GAAP See Generally Accepted Accounting Principles (GAAP) General ledger Accounts Payable Control account, 121 actual manufacturing overhead rates, 131 Finished Goods Control account, 121 Manufacturing Overhead Allocated account, 123 Manufacturing Overhead Control account, 123, 125 Materials Control account, 121 normal-costing system, 121 subsidiary ledgers, 121–22 T-accounts, 127 Work-in-Process Control account, 121, 124 Work-in-Process Inventory Records for Jobs account, 124 Generally Accepted Accounting Principles (GAAP), absorption-costing basis, 430 backflush costing, 802 fixed (manufacturing) overhead costs, 298 lean accounting, 806 manufacturing costs, 155 preparing financial statements for external reporting, 49 Goal congruence, 858 Goodness of fit, 400–401 www.downloadslide.net 960 INDEX Gourmet, 860 Government contracts, 48 Graphic approach and linear programming (LP), 460 Gross-margin percentage, 89, 652 Gross margin versus contribution margin, 88–89 Growth component, 497–98 H Heteroscedasticity, 404 High-low method of quantitative analysis, 382–83, 385 High-maintenance customers, 567 High-margin products, 526 Homogeneous cost pools, 159, 164, 573–74, 578 Homoscedasticity, 404 Hospitals, 289 Human aspects of budgeting, 220–23 Hurdle rate, 823 Hybrid costing systems, 697–700 Hybrid transfer prices, 863–64 difference between maximum and minimum transfer prices, 870–71 dual pricing, 871–72 negotiated pricing, 871 Hypothetical budgets, 253 I Idle facilities, 434–36 Idle time, 47 Incentives, 907–908 Income statements, 44 absorption costing income statements, 333 budgeted income statement, 214, 229 contribution income statement, 69 cost-hierarchy-based operating income statement, 569–71 cost of goods sold, 41 inventoriable costs, 45 multiple-year absorption costing, 334–37 multiple-year variable costing, 334–37 period costs, 41, 45 variable costing income statements, 332 yearly absorption costing, 332–34 yearly variable costing, 332–34 Incongruent decision making, 860 Incremental cost-allocation method, 622 Incremental costs, 436, 757 Incremental revenue, 436 Incremental revenue-allocation method, 627–28 Incremental unit-time learning model, 392–93 Independent variable, 380–81, 401–403 Indirect-cost pools, 111–12, 129, 159, 161 cost-allocation base for, 571 fully allocated customer profitability, 573 Indirect costs, 30, 50, 526–28 adjusted allocation-rate approach, 129 assigning, 108 budgeted rate, 113 cost-allocation bases, 108, 112, 115, 165–66 cost drivers, 159 cost objects, 30–31, 108 costs of quality (COQ), 751 customer-cost hierarchy, 561–62 customers, 570–71 denominator reason (quantity of cost-allocation base), 112 design of operations, 31 factors affecting, 31 fixed, 112 information-gathering technologies, 31 jobs, 115–16 materiality of cost, 31 numerator reason (indirect-cost pool), 111–12 overallocated, 128–29 overapplied, 128 predetermined rate, 113 products, 164–65, 166–68 proration approach, 129–31 rate per unit allocating to job, 115–16 specific cost, 31 time period, 111–12 total cost of products, 168 underallocated, 128–29 underapplied, 128 variable, 112 Indirect engineered costs, 504–505 Indirect labor costs, 46–47 Indirect manufacturing costs, 39, 115 Indirect manufacturing labor, 125, 386–87 Industrial engineering method, 378, 386, 388 Industry-market-size factor, 502 Inflation capital budgeting, 843–45 net present value (NPV) method, 844–45 nominal rate of return, 843–44 real rate of return, 843–44 Infobarn, Informal management control system, 857–58 Information data from similar companies, 257 decision process and, 427 economic decisions, 573–78 obtaining, 9, 110, 203 past data, 257 standards, 257–58 Information-gathering technologies, 31 Information technology, 264 Infrastructure costs, 505n Innovation, 7, 11–12, 487 In-Process Inventory Control account, 797 Insourcing, 434 Insourcing-versus-outsourcing decisions carrying costs of inventory, 441–42 insourcing, 434 international outsourcing, 436–37 opportunity-cost approach, 438–40 outsourcing, 434–36 qualitative factors, 436 relevance, 436 strategic factors, 436 total alternatives approach, 437–38 Inspection point, 721 normal spoilage, 727–29 Institute of Management Accountants (IMA), 16, 17 “Resolution of Ethical Conflict,” 18 Interactive control systems, 913 www.downloadslide.net INDEX Interest tables compound amount (future value) of annuity of $1, 929, 933 future amount of $1, 927–28, 931 present value of $1, 928, 932 present value of ordinary annuity of $1, 929–30, 934 Intermediate product, 862, 873–74 Internal-business perspective, 493 Internal-business perspective of quality cause-and-effect diagrams, 753–54 control charts, 752–53 pareto diagrams, 753 Six Sigma quality, 756 Internal-business-process perspective, 487, 892 Internal capabilities, 480–81 Internal failure costs, 751 Internal rate-of-return (IRR) method, 824–26 International Organization for Standardization (ISO), 749 International outsourcing, 436–37 International pricing, 543–44 Internet bottlenecks, 762 Inventoriable costs, 39 flow of, 40–44 income statement, 45 Inventory See warehouse inventory Inventory Control account, 800 Inventory costing, 341–43 Inventory management carrying costs, 779 costs associated with goods for sale, 779–80 costs of quality (COQ), 779–80 just-in-time (JIT) production, 792–95 materials requirements planning (MRP) system, 792 ordering costs, 779 purchasing costs, 779 retail organizations, 779–87 stockout costs, 779 Inventory-related relevant costs, 785 Investment center, 218, 861 Investments, 444–45, 893, 900 Investors relations, 14 sustainability, Irrelevant costs in relevant-cost analysis, 433 ISO 9001 certification, 749 ISO 9000 standards, 749 ISO 14000 standards, 749 J Job costing abnormal rework, 732 abnormal spoilage, 731 actual costing, 111 decision making, 111 evaluating performance, 111 evaluation and implementation, 110–13 general approach to, 113–18 learning from, 111 normal costing, 113 normal rework, 732 normal spoilage, 730–31 obtaining information, 110 predictions about future, 111 problems and uncertainties, 110 rework, 731–32 spoilage, 730–31 technology, 118 time period to compute indirect-cost rates, 111–12 Job-costing system, 109–10 versus process-costing system, 676–77 Job-cost record, 113, 126–27 Job-cost sheet, 113 Jobs, 109 actual costs, 111 chosen cost object, 113 direct costs, 113–115, 118–20 direct materials, 113 indirect costs, 115–16 job-cost records, 121 manufacturing costs, 119 total cost, 116–17 Joint-cost allocation approaches, 646–53 benefits-received criterion, 647, 654–55 choosing method of, 654–55 common allocation basis, 654 computing, 652 constant gross-margin percentage NVR method, 651–54 incremental costs, 656 market-based data, 646 net realizable value (NRV) method, 650–51, 654 overall gross-margin percentage, 652 physical-measure method, 648–50 physical measures, 647 processing decisions independence, 654 reasons to use, 645–46 sales value at splitoff method, 648, 654 separable costs, 656 simplicity, 654 total production costs for products, 652 Joint costs, 644 decision making, 655–57 joint products, 648 not allocating, 655 Joint production process, 644–45 Joint products, 645, 647–48 Journal entries fixed overhead costs, 300–302 operating-costing systems, 700 spoilage, 727 standard costs, 262–64 variable overhead costs, 296 zero beginning and some ending work-in-process inventory, 682–83 Just-in-time (JIT) production activity-based costing (ABC) systems, 802, 804 control, 795 costs and benefits, 793–94 defects, 793 enterprise resource planning (ERP) systems, 794–95 features, 792–93 lean accounting, 804–06 manufacturing cells, 792 961 www.downloadslide.net 962 INDEX Just-in-time (JIT) production (continued) multiskilled workers, 792 performance measures, 795 product costing, 795 service industries, 794 setup time, 793 suppliers, 793 Just-in-time (JIT) purchasing, 793 costs, 788 economic order quantity (EOQ), 787 planning and control, 791–92 quality, 788 relevant costs, 787–88 supply-chain analysis, 791–92 Just-in-time production, 337 K Kaizen, 534 budgeting, 222, 267 Knowledge of operations, 376 L Labor costs fixed costs or variable costs, 33 measuring, 46 Labor records by employee, 125 Labor standards, 208 Labor-time sheet, 113–115 Leadership strategy, Lean accounting Generally Accepted Accounting Principles (GAAP), 806 just-in-time (JIT) production, 804–806 value stream, 804–806 Lean production, 792 Learning, 11, 111, 200–201, 203 Learning-and-growth perspective, 487, 493, 757, 892 Learning curves, 390–94, 403 Lease cost, 50 Level of activity, 376 Level variances, 256 Levers of control, 911–13 Life-cycle budgeting, 540–42 Life-cycle costing, 540–42 Linear cost functions, 373–75 Linear programming (LP) constraints, 459 graphic approach, 460 objective function, 458, 459 optimal solution, 459 problem-solving steps, 458–59 sensitivity analysis, 461 trial-and-error approach, 459–60 Line management, 13–14 Linked scorecard, 488 Locked-in costs, 533 Logistic regression, 389 Long-run budgets, 198 Long-run costing, 526–530 Long-run pricing decisions activity-based costing (ABC) systems, 527–28 calculating product costs, 527–28 cost-based approach, 528, 530 market-based approach, 528, 530–32 Long-term assets, 901, 903 Longview, 217 Loss from Abnormal Spoilage account, 720, 723, 731 LP See linear programming (LP) M Machine learning system, 389 Machining departments, 611–12 Main product, 645, 647 Maintenance and variable overhead costs, 289 Make-or-buy decisions, 434–42 Malcolm Baldrige National Quality Award, 749 Management accountant, 15–16 organization structure and, 13–16 strategic decisions, 3–4 Management accounting, 2, 12–14 Management by exception, 250 Management control systems, 857–58 Managers accurate budget forecasts, 221 budgetary slack, 220–21 budgeting process, 201–02 core values and norms, 221 cost objects, 30–31 costs, 219 deferring maintenance, 340 distinguishing performance from performance of subunits, 907–11 economic order quantity (EOQ) decision model, 786–87 fixed manufacturing costs, 340 formulating strategy, increasing compensation, 338–39 management accounting, 2, order to increase production, 340 performance evaluation, 220 undesirable buildup of inventories, 339–40 variances, 264–67 Manufacturing broad averaging, 154–55 normal-costing system, 120–28 Manufacturing cells, 792 Manufacturing companies, 38, 44–45 flow of inventorial costs and period costs, 40–44 Manufacturing cost base, 538 Manufacturing costs, 39, 43, 205, 431 conversion costs, 45–46 jobs, 119 Manufacturing cycle efficiency (MCE), 760 Manufacturing cycle time, 760, 793 Manufacturing Department Overhead Records subsidiary ledger, 124–25 Manufacturing lead time, 760 Manufacturing overhead, 123 Manufacturing Overhead Allocated account, 128–29 Manufacturing Overhead Control account, 126, 128–29 Manufacturing overhead costs, 39, 41, 43, 45, 205 budget, 209–12 Margin of safety, 81 Market-based approach to long-run pricing decisions, 528, 530–32 Market-based data for joint-cost allocation, 646 Market-based transfer prices, 863–64 www.downloadslide.net INDEX distress prices, 866–67 imperfect competition, 867 perfectly-competitive-market case, 866 Marketing, Markets competition, 159 potential entrants into, 478 Market-share variance, 583–84 Market-size variance, 583–84 Master budget, 199, 203, 251–252 Master-budget capacity utilization, 344–45, 349–51, 353 Materials-handling costs, 388 Materials-handling labor-hours, 308 Materials-handling services, 603–604 Materials Inventory Control account, 797 Materials management costs, 611–12 Materials records, 124–25 Materials Records subsidiary ledger, 124 Materials requirements planning (MRP) system, 792 Materials-requisition record, 113 Matrix method, 617 McGahee v Northern Propane Gas Co., 544n Mean defect rate (m), 754, 756 Merchandise inventory, 38 Merchandising-sector companies activity-based costing (ABC) systems, 175 inventoriable costs, 39 merchandise inventory, 38 Miscellaneous costs, 229 Mixed costs, 34, 374 Mix variance, 260, 271–74 Moderate ties, 483–84 Monopolies, 526 Moral hazard, 907–908 Motivation, 858 Multicollinearity, 408–409 Multinational companies budgets, 223 calculating foreign division’s ROI in foreign currency, 905 calculating foreign division’s ROI in U.S dollars, 906 decentralization, 861 performance measurement, 904–906 transfer pricing, 874–78 Multiple regression, 406–408 Multiple regression analysis, 384–85 Multiple support departments allocating costs, 610–20 allocating engineering, production control, and materials management costs to machining and assembly operating departments, 611 allocating plant administration costs to support and operating departments, 610–11 artificial costs, 617 complete reciprocated costs, 617 direct method, 613–14 interrelations between, 618 Job WPP 298 calculations, 619–20 matrix method, 617 reciprocal method, 615–18 step-down method, 614–15 support and operating departments, 610 N 963 Negotiated pricing, 871 Net income and taxes, 76–77 Net-initial-investment cash flows, 833–34 Net operating profit after taxes (NOPAT), 898n Net present value (NPV) method, 823–24, 838 comparing with internal rate-of-return (IRR) method, 826 inflation, 844–45 nominal approach, 844 real approach, 844 shareholder value maximization, 826 Net realizable value (NRV) method, 650–51, 654 New-product development time, Nonfinancial measures, 908 customer satisfaction, 751 internal-business-process quality, 756 quality, 759 Nonfinancial performance measurement, 267, 313, 892–93 Nonfinancial variables, 341 Nonlinear cost functions cumulative average-time learning model, 391 experience curve, 390–93 incremental unit-time learning model, 392–93 learning curves, 390–94 relevant range, 389 step cost function, 389–90 step fixed-cost function, 390 step variable-cost function, 390 Nonmanufacturing costs, 205, 353–54 budget, 213–14 Nonmanufacturing settings, 312–13 Nonuniform cash flows, 828–29 Non-value-added costs, 533 Normal-budget capacity utilization, 351 Normal capacity utilization, 344–45, 349–53 Normal costing, 113 budgeted indirect-cost rates, 118 earlier information, 119 manufacturing overhead allocated, 123, 129 manufacturing overhead applied, 123 pricing or product-mix decisions, 346 variation from, 133–34 Normal-costing system allocation of manufacturing overhead to jobs, 123 backflush costing, 796–802 cost of goods sold, 123 direct labor, 122 direct materials usage, 122 finished goods inventory records by jobs, 127 general ledger, 121 indirect labor, 122 indirect materials usage, 122 job costing, 127–28 jobs completed and transferred to finished goods, 123 labor records by employee, 125 manufacturing costs of job, 119 Manufacturing Department overhead records, 126 manufacturing overhead costs, 122, 123 manufacturing payroll, 122 marketing costs, 123 materials records by type of material, 124–25 nonmanufacturing costs, 127–28 www.downloadslide.net 964 INDEX Normal-costing system (continued) purchases of materials, 121 sales revenue from jobs sold and delivered, 123 sequential tracking, 796 subsidiary ledgers, 124 subsidiary records, 127 transactions explanations, 121–23 variances, 799–802 work-in-progress inventory records, 126–27 Normal rework, 732 Normal spoilage, 720 attributable to specific job, 730 common to all jobs, 730–31 cost allocation, 727–29 inspection point, 727–29 job costing, 730–31 Not-for-profit organizations cause-and-effect relationships, 493 cost-volume-profit (CVP) analysis, 87–88 Number of units manufactured, 251 Numerator reason (indirect-cost pool), 111–12 O Objective function, 458–59 One-time-only special orders, 430–31 On-time performance, 761 Operating budgets, 226 See also budgets budgeted income statement, 214 cost of goods sold budget, 213 direct manufacturing labor costs budget, 208–209 direct materials purchases budget, 207–208 direct materials usage budget, 207–208 ending inventories budget, 212–13 financial budget, 203 manufacturing overhead costs budget, 209–212 nonmanufacturing costs budget, 213–14 production budget, 206–207 revenues budget, 206 risks, 216 supporting schedules, 203 Operating-costing systems, 699–700 Operating costs, 445 Operating departments, 602, 610–611 Operating income, 44, 133 breakeven point (BEP), 74 calculating, 68–69, 71 cost leadership effect on, 502 growth component of change, 497–98 industry-market-size factor effect on, 502 price-recovery component, 498–99, 501–503 product differentiation effect, 502 productivity component, 499–503 relationship to contribution margin percentage, 70 sales-volume variance, 255 strategic analysis of, 495–503 target, 74–76 Operating-income volume variance, 306 Operating leverage, 83–84 Operating plans budgets, 198–99 Operational measures of time, 760–61 Operation-costing systems, 697–700 Operations, 8–9, 487, 697 Opportunity-cost analysis, 439–42 Opportunity cost of capital, 823 Opportunity costs, 440 Order-delivery process, 480–81 Ordering costs, 779 Organizational learning, 266–67 Organizational structure, 13–16, 217–18 Orphan objectives, 484 Outcomes, 92–94 Output, duplication of, 860 Output unit-level costs, 163 Outsourcing idle facilities, 434–36 international outsourcing, 436–37 risks, 436 Overallocated indirect costs, 128–29 Overallocated overhead, 129–31 Overall-total variance, 305 Overapplied indirect costs, 128 Overhead costs, 210, 574–77 Overhead cost variances combined variance analysis, 303–305 4-variance analysis, 303 integrated analysis, 303–305 Overhead variances, 312–313 Overtime premium, 46–47 P Pareto diagrams, 753 Partial productivity, 511–13 Past costs, 427–28, 451–53 Past data, 257 Past performance, 200–201 Payback method, 827–29 Payroll fringe costs, 47–48 Peak-load pricing, 543 Perfectly-competitive-market case, 866 Performance evaluation, 111, 203, 218 balanced scorecard, 488–89 capacity levels, 349 decision making, 453–55, 656 equipment-replacement decisions, 453–55 framework for judging, 200–201 information for, 50 learning curves, 394 project management, 838 Performance-evaluation model, 454 Performance measurement, 481–82 absorption costing, 338–41 accounting-based measures for business units, 893–99 aligning with financial goal, 892 alternative asset measurements, 900–903 alternative definitions of investment, 900 benchmarks, 909 changing period used to evaluate, 341 comparing, 899 details of, 892, 899–903 effectiveness, 266 efficiency, 266 executive performance measures and compensation, 910–11 www.downloadslide.net INDEX feedback mechanism, 892 financial and nonfinancial, 267, 892–93 financial variables, 341 incentives, 908 incentives versus risk, 907–908 individual activity level, 909–910 just-in-time (JIT) production, 795 management’s freedom to build up excess inventory, 340 manager’s performance from subunit’s performance, 907–911 multinational companies, 904–906 nonfinancial variables, 341 performing multiple tasks, 909–10 proposals for revising, 340–41 relative performance evaluation, 909 target level of performance, 892, 903–904 team-based compensation arrangements, 910 timing of feedback, 904 variances, 266 Performance reports, 219 Performing multiple tasks, 909–910 Period costs, 39, 44 flow of, 40–44 income statement, 45 R & D expenses, 40 Physical-measure method, 648–50 Physical measures for joint-cost allocation, 647 Planned unused capacity, 349 Planning, 10–11 activities, 174 budget, 10 capacity costs, 352 fixed overhead costs, 289 just-in-time (JIT) purchasing, 791–92 obtaining information for, 50 postdecision information, 10 predecision information, 10 taxes, 14 variable overhead costs, 289 Plant administration costs, 610–11 Plant manager, 13 Post-investment audits, 837 Post-sales-service process, 487 Potential entrants into market, 478 Practical capacity, 344–49, 352 allocating costs, 605 fixed manufacturing overhead costs, 351 production-volume variance, 350 Predatory pricing, 544–45 Predetermined indirect-cost rate, 113 Prediction error cost, 785–86 Predictions about future, 111, 203 Present value of $1, 928, 932 Present value of ordinary annuity of $1, 929–30, 934 Prevention costs, 750 Previous-department costs, 692 Price discounts, 560–61 Price discrimination, 543–44 Price-recovery component, 497, 501–503 Prices, incorporating learning-curve effects into, 393–94 Price variance, 256–64, 272 Pricing cost, 48–49 965 Pricing decisions, 172, 347–48, 656–57 antitrust laws, 544–45 collusive pricing, 545 competitors, 525–26 cost incurrence, 533–36 cost-plus pricing, 537–39 costs, 525–26 customers, 525–26 dumping, 545 international pricing, 543–44 life-cycle budgeting, 540–42 life-cycle costing, 540–42 locked-in costs, 533–36 long-run pricing, 526–30 non-cost factors, 543–44 peak-load pricing, 543 predatory pricing, 544–45 price discrimination, 543–44 stable prices, 526 value engineering, 533–36 Prime costs, 45 Probability distribution, 92 Problems, 9, 110, 203 Process costing with no beginning or ending work-in-process inventory, 677–78 spoilage, 720–27 standard-costing method, 704–707 transferred-in costs, 692–97 zero beginning and some ending work-in-process inventory, 678–83 Process-costing system, 109–110 accounting for variances, 705–707 versus job-costing system, 676–77 Process costing with some beginning and some ending workin-process inventory first-in, first-out (FIFO) process-costing method, 687–90 weighted-average process-costing method, 684–87 Processes designing, 5, 154–55 improvement decisions, 172–73 Producing for inventory, 339 Product cost, 48–50 budgeted, 207 calculating, 527–28 pricing, 48 product-mix decisions, 48 zero beginning and some ending work-in-process inventory, 681–82 Product-cost cross-subsidization, 154 Product costing, 346–47 just-in-time (JIT) production, 795 simplifying, 263 Product differentiation, 479, 502 Product-differentiation, 489 Production, 5, 602 budget, 206–207 Production control, 533 Production method, 658–59 Production process, 721 Production-volume variance, 298–303, 305–307, 334–36, 339, 349–52 www.downloadslide.net 966 INDEX Productivity, 497, 499–503, 511–13 Product life-cycle, 540–42 Product-mix decisions, 172, 442–44 Product profitability analysis, 526 Products, 645 comparable physical measures, 650 cost, cost allocation, 526 cost objects, 164 designing, 5, 154–55 direct costs, 164 diversity, 159 equivalent, 478 gross-margin percentages for, 647–48 high-margin, 526 indirect costs, 164–68 innovative, inventoriable costs, 39 joint-cost allocation, 645 more useful to customers, 4–6 negative allocations, 653 product profitability analysis, 526 profitability of, 30–31 quality, 7, 749 regulating rates or prices of jointly produced, 645–46 reimbursed under cost-plus contracts, 645 reverse-engineering, 531 sold at splitoff point, 656 substitute, supplying and delivering, total cost adding direct and indirect costs, 168 total production costs, 652 Products and processes design, Product-sustaining costs, 163 Product undercosting, 153 Professional accounting organizations, 16 Professional ethics, 16–18 Profitable customers, 567 Profit center, 218, 861 Profit margin, 88–89 Profit plan, 199 Profit potential, 478 Profit-volume (PV) graph, 76 Pro forma statements, 199 Project management, 837–38 Projects alternatives, 820 cash flows attributable to, 820 initial investment, 833 life-span cash flows, 819 long-run planning decisions, 819–22 monetary gain or loss from, 823–24 payback period, 827–29 performance evaluation, 838 post-investment audits, 837 recouping initial investment in, 827–29 rejecting, 820 research and development (R&D) investment, 838–39 working-capital investment, 833 Proration approach, 129–31, 350 Public Company Accounting Oversight Board, 16 Purchase-order lead time, 780 Purchasing costs, 779 just-in-time (JIT) purchasing, 787–92 PV graph See profit-volume (PV) graph Q Qualitative analysis, 427 Qualitative factors, 429–30, 436 Quality analyzing problems, 752–56 cause-and-effect diagrams, 753–54 as competitive tool, 749–52 conformance quality, 749–50 contribution margin, 758 control charts, 752–53 costs and benefits of improving, 757–58 costs of quality (COQ), 750–52, 779–80 design quality, 749–50 evaluating performance, 759 financial perspective, 750–52 improvements, 480–81, 757 incremental costs, 757 international standards for, 749 just-in-time (JIT) purchasing, 788 learning-and-growth perspectives, 757 lower rework, customer support, and repairs, 757 nonfinancial measures to evaluate and improve, 751–57 pareto diagrams, 753 relevant costs, 789–791 Six Sigma quality, 756 supplier evaluation, 789–91 supply chain, value chain, Quantitative analysis, 379 cost drivers, 381–82, 388 decision process, 427 dependent variable, 380–81 estimating cost function, 380–85 high-low method, 382–83 independent variable, 380–81 plotting data, 381 regression analysis, 384–85 Quantitative factors, 429–30 R Rate variance, 258 R&D See research and development (R&D) Receipt time, 760 Reciprocal method, 615–19 Reciprocated budgeted costs, 617 Reengineering, 480–81 Refining costing systems, 158–60 Regression analysis, 384–85 Bonferroni correction, 389 coefficient of determination, 400–401 confidence interval, 402 cost drivers, 386–87, 405 cross-validation, 389 dependent variable, 386 disturbance term, 403 Durbin-Watson statistic, 404–405 error term, 403 estimation assumptions, 403–405 www.downloadslide.net INDEX false positives, 389 goodness of fit, 384, 386, 400–401 heteroscedasticity, 404 homoscedasticity, 404 independent variable, 387, 401–403 multicollinearity, 408–409 multiple regression analysis, 384–85 multiple regression and cost hierarchies, 406–408 regression line, 400 residual term, 384, 403 simple regression analysis, 384–385 standard error, 401–403 Relative performance evaluation, 909 Relevance insourcing-versus-outsourcing decisions, 436 one-time-only special orders, 430–31 potential problems, 433 product-mix decisions, 442–44 qualitative factors, 429–30 quantitative factors, 429–30 relevant costs, 427–29 relevant revenues, 427–29 short-run pricing decisions, 433–34 Relevant after-tax flows, 831–32 Relevant cash flows cash-flow categories, 833–36 discounted cash flow analysis, 830–31 relevant after-tax flows, 831–32 Relevant-cost analysis adding customer, 450 branch offices or business divisions, 450 dropping customer, 448–49 general assumptions, 432 irrelevant costs, 432 potential problems, 432 qualitative factors, 429–30 quantitative factors, 429–30 unit fixed costs, 432–33 Relevant costs, 427–29, 447–51, 655 incremental, 785 just-in-time (JIT) purchasing, 787–88 quality, 789–91 short-run pricing decisions, 433 timely deliveries, 789–91 warehouse inventory, 780–82 Relevant opportunity cost of capital, 785 Relevant range, 35–36, 373, 389 Relevant-revenue analysis, 448–50 Relevant revenues, 427–29, 655, 764–65 Reorder point, 782–83 Reorganization, 427–28 Required rate of return (RRR), 822–23 Research and development (R&D), 5, 214 expenses, 40 investment in, 838–39 Residual income (RI), 895–96 Residual term, 384, 403 Responsibility accounting, 217–20 Responsibility centers, 218–19, 861 Retail organizations costs associated with goods for sale, 779–80 inventory management, 779–87 Return on investment (ROI), 894–95 calculating foreign divisions’ in foreign currency, 905 calculating foreign division’s in U.S dollars, 906 Return on sales (ROS), 898 Revenue allocation bundled products, 624–29 incremental revenue-allocation method, 627–28 stand-alone revenue-allocation method, 626–27 taxes and, 629 Revenue-based cost pools, 574 Revenue center, 218, 861 Revenue driver, 73 Revenue objects, 625 Revenues, 39, 73, 206, 625 Reverse-engineering products, 531 Rework, 719, 731–32 Rightsizing, 505–506 Risk management, 14 Risks environmental and social performance, 491 versus incentives, 907–908 operating budgets, 216 sensitivity analysis, 216 Rolling budgets, 202, 220–21 Rolling forecast, 202 S Safety stock, 783–85 Sales forecast, 206 Sales management systems, 206 Sales method, 659 Sales mix, 85–86 Sales-mix variance, 581 Sales-order costs, 562 Sales-quantity variance, 582 Sales value at splitoff method, 648, 654 Sales variances, 579–84 Sales-volume variance, 254–55, 305–307, 581 Sarbanes-Oxley Act (2002), 16 Scrap, 719, 733–35 Second-stage allocation, 161 Selling price, 73 Selling-price variance, 256 Sell-or-process-further decisions, 655–56 Semiconductor industry, 344 Semivariable costs, 34, 374 Sensitivity analysis, 80–81, 216, 826–27 cash budget, 231–32 linear programming (LP), 461 Separable costs, 644 Sequential allocation method, 614–15 Sequential tracking, 796 Sequential-tracking costing systems, 796 Serial correlation, 404 Service department, 602 Service organizations, 38 activity-based costing (ABC) systems, 175 cost-volume-profit (CVP) analysis, 87–88 just-in-time (JIT) production, 794 overhead variances, 312–13 standard costs, 264 time-and-materials method, 539 967 www.downloadslide.net 968 INDEX Services, cost-plus contracts, 645 joint-cost allocation, 645 jointly produced, 645–46 quality, 749 supplying and delivering, Service-sustaining costs, 163 Service undercosting, 153 Setup labor-hours, 205 Setup time, 793 Shapley value method, 622 Shared value, 491 Sherman Act, 544 Short-run budgets, 198 Short-run pricing decisions, 433–34 Shrinkage costs, 780 Simple costing system, 154–57 Simple regression analysis, 384–85 Simplex method, 459n Single indirect-cost pool, 155–57 Single-rate method actual fixed-cost resources, 605 advantages and disadvantages, 606 allocating support department costs, 602–603 base choice, 607–10 budgeted costs versus actual costs, 607–10 budgeted rates and actual usage, 608–609 budgeted usage versus actual usage, 608 budgeted versus actual rates, 607–608 materials-handling services, 603–604 Six Sigma quality, 756 Slope coefficient, 373–74 Smart Grid technology, 601–602 Social performance and balanced scorecard, 489–93 Source document, 113 Specification analysis, 403–405 Specific cost, 31 Spending variance, 305 Spinoff point, 648 joint products, 647 sales value at, 654 Splitoff point, 644 Spoilage, 719 abnormal spoilage, 720 disposal value, 727 first-in, first-out (FIFO) process-costing method, 726 job costing, 730–31 journal entries, 727 normal spoilage, 720 process costing, 720–27 standard-costing method, 737–39 types, 719–20 weighted-average process-costing method, 723–25 Staff management, 13–14 Stand-alone cost-allocation method, 621–22 Stand-alone revenue-allocation method, 626–27 Standard costing absorption costing, 336 benefits, 704 budgeted fixed overhead rates, 291–92 budgeted variable overhead rates, 290–91 computations under, 704–705 cost-allocation bases, 290 direct costs, 290 fixed overhead costs, 306 overhead costs, 290 pricing or product-mix decisions, 346 variances, 705–707 Standard-costing method process costing, 704–707 spoilage, 737–39 Standard-costing systems backflush costing, 796–802 sequential tracking, 796 variances, 799–802 Standard costs, 257, 262–64 variance analysis, 256–58 wide applicability of, 264 Standard deviation (s), 754, 756 Standard error of the estimated regression, 401–403 Standard input, 257 Standard manufacturing overhead cost, 263 Standard price, 257 Standards, 257–58 learning-curve effects, 393–94 Static budgets, 25–253 Static-budget variance, 251–52, 255, 305, 580 Statistical process control (SPC), 752 Statistical quality control (SQC), 752–53 Step-down method, 614–15, 619 Step fixed-cost function, 390 Step variable-cost function, 390 Stockholders’ equity, 900 Stockout costs, 779 Strategic analysis of operating income growth component, 497–98, 501–503 price-recovery component, 497, 498–99, 501–503 productivity component, 497, 499–503 Strategic business units (SBUs), 493 Strategic cost management, Strategic objectives, 483–85 Strategic planning, 14, 198–99 Strategies, 3–4, 478, 911–13 balanced scorecard, 481–494 bargaining power of customers, 478 bargaining power of input suppliers, 479 cash available to fund, communicating, 493 competitors, 478 cost leadership, 479, 495–97 customer preference map, 479 customer relationship management (CRM), 5–6 decision making, 9–10 decision-making framework, 505 equivalent products, 478 evaluating success of, 479, 494 formulating, 478–79 implementation, 481–94 internal capabilities, 480–81 operating-income increases, 495–96 performance measures, 481–82 potential entrants into market, 478 product differentiation, 479 www.downloadslide.net INDEX Strategy maps, 482–85 Stretch targets, 221–22 Structural analysis strategy maps, 483–85 Suboptimal decision making, 859–60 Subsidiary ledgers, 121, 124 Substitutable inputs, 271–74 Substitute products, Subunits and manager’s performance, 907–11 Sunk costs, 428 Super-variable costing, 341 Supervision, 533 Supplier-managed inventory, 791 Suppliers bargaining power, 4, 479 evaluation, 789–91 just-in-time (JIT) production, 793 Supply chain, 6–9 Supply-chain analysis, just-in-time (JIT) purchasing, 791–92 Support department costs, 602–606 Support departments, 602 materials-handling services, 603–604 multiple, 610–20 plant administration costs, 610–11 supply of capacity, 604–605 Sustainability, 7–8, 490 life-cycle costing, 542 monitoring and managing, 11–12 Sustainability Accounting Standards Board (SASB), 542 T Target costing, 534–36 competitor analysis, 531 customers’ perceived value, 530 deriving, 532 product satisfying customer needs, 531 target pricing for, 530–32 value engineering, 532 Target cost per unit, 532, 534–36 Target level of performance, 903–904 Target net income and taxes, 76–77 Target operating income, 74–76 Target operating income per unit, 532 Target price, 530–32, 536, 539 Target rate of return on investment, 537–38 Taxes annual depreciation deduction, 835–36 capacity levels, 352 multinational corporations, 874–78 planning, 14 revenue allocation, 629 TDABC See time-driven activity-based costing (TDABC) systems, 162 Team-based compensation arrangements, 910 Technical considerations, 13 Technology role in job costing, 118 Terminal disposal of investment, 836 Theoretical capacity, 344–45, 346–47 fixed manufacturing overhead costs, 351 production-volume variance, 350 Theory of constraints (TOC), 444–47 Throughput costing, 341 Throughput margin, 341, 444–45 Throughput-margin analysis, 444–47 Ties, 483–84 Time average waiting time, 762–63 bottlenecks, 761–63 as competitive tool, 760–63 costs of delays, 764–65 customer-response time, 760 delivery time, 760 feedback, 904 fixed overhead costs, 289 manufacturing cycle efficiency (MCE), 760 on-time performance, 761 operational measures of, 760–61 purchase-order lead time, 780 receipt time, 760 supply chain, time-based measures, 766–77 time drivers, 761–63 value chain, Time-and-materials method, 539 Time-based measures, 766–77 Time-driven activity-based costing (TDABC) systems, 162, 175 Time drivers, 761–63 Timely deliveries, 789–91 Time-series data, 381 TOC See theory of constraints (TOC) Total-alternatives approach, 437–40 Total assets, 900 Total costs, 72–73 change in level of, 34–35 jobs, 116–17 unit costs, 36–38 variable costs, 32 Total factor productivity (TFP), 512–13 Total fixed costs, 73, 433 Total manufacturing costs, 41 Total quality management (TQM), 7, 264 Total revenues, 68, 72–73 Total variable costs, 68 TQM See total quality management (TQM) Transfer prices calculating, 863–65 cost-based transfer prices, 863–64, 867–69 criteria for evaluating, 862 general guidelines for, 872–74 hybrid transfer prices, 863–64, 870–72 illustration of, 863–65 market-based transfer prices, 863–66 multinational companies, 874–78 multiple objectives, 877–78 prorating between maximum and minimum transfer prices, 870–71 Transferred-in costs, 692 first-in, first-out (FIFO) process-costing method, 695–96 weighted-average process-costing method, 693–95 Treasury, 14 Trial-and-error approach, 459–60 969 www.downloadslide.net 970 INDEX Trigger points, 484 backflush costing, 797–99 sequential-tracking costing systems, 796 Triple bottom line, 490 U Uncertainties, 9, 81, 91, 110, 203 Underallocated indirect costs, 128–29 Underallocated overhead, 129–31 Underapplied indirect costs, 128 Unfavorable variance, 251–52 Unhealthy competition, 860 Uniform cash flows, 827–28 Unit costs, 36–38 Unit fixed costs, 432–33 Unprofitable customers, 567 Unused capacity, 504–506 U.S Clean Air Act, 542 U.S Department of Commerce, 545 U.S Government contracts, 623–624 U.S International Trade Commission, 545 U.S Robinson-Patman Act (1936), 544 U.S Superfund Amendment and Reauthorization Act, 542 U.S Supreme Court, 544–45 V Value-added activities, 760 Value-added costs, 533 Value chain, 4–7 business functions, 526 cost and efficiency, cost savings, 534 gathering information from, 820 identifying activities of, 160–62 levels of performance, 7–9 unit costs, 37 Value-chain analysis, 4–6, 533–34 Value engineering, 532, 534–36 Value stream, 804–806 Variable batch-level direct costs, 307–308 Variable-cost bases, 869 Variable-cost components, 511–12 Variable costing, 330, 336–38, 342–43 absorption costing, 330–32 breakeven points, 357–58 external reporting, 342 fixed manufacturing costs, 332–34, 343 operating income, 333, 337–38 throughput costing, 341 Variable costing income statements, 332–37 Variable cost per unit, 73 Variable-cost pool, 602–603 Variable costs, 32–36, 69 alternative structures, 82–83 budgeted, 603–604 cost driver, 35 cost objects, 375 cost per unit, 32 cost-plus pricing, 538–39 fixed costs, 32–33, 73 labor costs, 33 linear cost functions, 373 product cost base, 538 relevant range, 35–36 total cost, 32 Variable indirect costs, 112 Variable machine setup overhead costs, 211–212 Variable manufacturing cost base, 538 Variable manufacturing costs, 89 Variable manufacturing overhead, 251 Variable overhead, 303–305 Variable Overhead Allocated account, 296 Variable Overhead Control account, 296 Variable overhead costs, 289–90 budgets, 210 journal entries, 296 Variable overhead cost variances flexible-budget analysis, 292 signals, 295 variable overhead efficiency variance, 293–94 variable overhead spending variance, 294–95 Variable overhead efficiency variance, 293–94 Variable overhead flexible-budget variance, 292 Variable overhead spending variance, 294–95 Variance analysis, 266 activity-based costing (ABC) systems, 307–10 benchmarking and, 267–69 continuous improvement, 267 decision making, 251 direct materials-handling labor costs, 308–10 financial and nonfinancial performance measures, 267 fixed batch-level direct costs, 307–308 fixed setup overhead costs, 310–11 organizational learning, 266–67 standard costs, 256–58 variable batch-level direct costs, 307–308 Variances, 50, 218, 250–51 backflush costing, 799–802 denominator-level variance, 298 early warning, 218 efficiency variance, 256–64 evaluating strategy, 218 favorable variance, 251–52 fixed overhead cost variances, 297–303 fixed overhead flexible-budget variance, 297 fixed overhead spending variance, 297 flexible-budget variances, 254, 255–56 isolating, 263 level variances, 256 management use of, 264–67 mix variance, 260 multiple causes of, 264–65 operating-income volume variance, 306 overall-total variance, 305 performance evaluation, 218 performance measurement, 266 price variance, 256–264 production-volume variance, 298–300, 305–307 rate variance, 258 sales-volume variances, 254–55, 305–307 selling-price variance, 256 static-budget variance, 251–52 unfavorable variance, 251–52 variable overhead cost variances, 292–96 variable overhead efficiency variance, 293–94 www.downloadslide.net INDEX variable overhead flexible-budget variance, 292 variable overhead spending variance, 294–95 when to investigate, 265–66 write-off variances, 350–51 yield variance, 260 Vendor-managed inventory, 791 Volume, 34–36 W Wages Payable Control account, 263 Warehouse inventory carrying charge for, 340 carrying costs, 441–42, 780–82 direct materials inventory, 38 economic-order-quantity decision model, 780–82 economic order quantity (EOQ), 780–82 finished-goods inventory, 38–39 inventory-related relevant costs and effects, 785 merchandise inventory, 38 prediction error cost, 785–86 reducing levels of, 337 relevant costs, 780–82, 785 reorder point, 782–83 safety stock, 783–85 shrinkage costs, 780 undesirable incentives to build up, 339–40 valuation, 175 when to order units, 782–83 work-in-process inventory, 38–39 971 Weak ties, 483–84 Weighted-average cost of capital (WACC), 897 Weighted-average process-costing method, 684–87 versus first-in, first-out (FIFO) process-costing method, 691–92 spoilage, 723–25 transferred-in costs, 693–95 Weighted Shapley value method, 628n Whale curve, 567 Wholesale channel, 574 Wholesale-channel revenue-based cost pool, 577 Wishbone diagrams, 753–754 Work-in-Process Control account, 130–32, 262, 296, 301–302, 305, 350 Work-in-process inventory, 38–39, 41, 43, 120, 203 no beginning or ending, 677–78 some beginning and some ending work-in process inventory, 684–92 zero beginning and some ending, 678–83 Work-measurement method, 378, 388 Write-off approach, 131 Y Yearly budgets, 202 Yield variance, 260, 271–74 Z Zero beginning and some ending work-in-process inventory equivalent units, 679–80 journal entries, 682–83 product costs calculations, 681–82 www.downloadslide.net This page 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