Find more at http://www.downloadslide.com Find more at http://www.downloadslide.com Find more at http://www.downloadslide.com Find more at http://www.downloadslide.com Find more at http://www.downloadslide.com MANAGERIAL A CCO U NT I NG Find more at http://www.downloadslide.com This page intentionally left blank Find more at http://www.downloadslide.com MANAGERIAL AC C O U N T I N G RAMJI BALAKRISHNAN The University of Iowa K S I VA R A M A K R I S H N A N University of Houston G E O F F R E Y B S P R I N K L E Indiana University John Wiley & Sons, Inc Find more at http://www.downloadslide.com PUBLISHER ASSOCIATE PUBLISHER SENIOR ACQUISITIONS EDITOR SENIOR MARKETING MANAGER SENIOR PRODUCTION EDITOR Senior designer SENIOR ILLUSTRATION EDITOR EDITORIAL ASSISTANT ASSOCIATE Photo editor Senior Media editor INTERIOR DESIGN COVER DESIGN COVER PHOTO George Hoffman Christopher DeJohn Jeff Howard Julia Flohr William A Murray Kevin Murphy Sandra Rigby Kara Taylor Sheena Goldstein Allie K Morris Nancy Field David Levy Tyler Stableford/Getty Images This book was set in New Baskerville Regular by GGS Book Services PMG and printed and bound by R.R Donnelley This book is printed on acid free paper.   Copyright ©2009 John Wiley & Sons, Inc All rights reserved No part of this publication may be ­reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923 (Web site: www.copyright.com) Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201) 748-6011, fax (201) 748-6008, or online at: www.wiley.com/go/permissions To order books or for customer service please call 1-800-CALL WILEY (225-5945) Library of Congress Cataloging-in-Publication Data Balakrishnan, Ramji   Managerial accounting/Ramji Balakrishnan, K Sivaramakrishnan, Geoffrey B Sprinkle     p cm   Includes index   ISBN 978-0-471-46785-4 (cloth)   Managerial accounting I Sivaramakrishnan, K (Konduru) II Sprinkle, Geoffrey B   III Title   HF5657.4.B34 2009 2008039519   658.15'11—dc22 Printed in the United States of America 10  9  8  7  6  5  4  3  2  Find more at http://www.downloadslide.com Dedication Ramji Balakrishnan To my parents, Usha, Vasu and Uma K Sivaramakrishnan To my father, my sisters Viji and Parvathi, my wife Devika, my daughter Vidya, and in loving memory of my mother Geoffrey B Sprinkle To Shari, Jason, Jack, and Scott Find more at http://www.downloadslide.com This page intentionally left blank Find more at http://www.downloadslide.com 662 Glossary Contribution margin ratio The unit contribution margin divided by the unit price The contribution margin ratio represents the portion of each sales dollar that, after covering variable costs, goes toward covering fixed costs and, ultimately, profit Contribution margin statement An income statement that groups costs by their variability, reporting variable costs and fixed costs as separate line items Control account A temporary holding account for accumulating costs such as direct labor and overhead We zero out a control account at the end of an accounting period Control decisions Decisions related to motivating, monitoring, and evaluating performance Controllable cost, controllable benefit A cost or benefit that a decision maker chooses to incur, relative to doing nothing Controllable performance measure A performance measure that reflects only the consequences of the actions taken by the decision maker Controller The person in an organization who manages the day-to-day accounting and issues guidance concerning corporate accounting policies Conversion costs The sum of direct labor and manufacturing overhead costs Core competency Skill set and expertise that characterize a firm and its employees Cost accounting Accounting systems for calculating the values of ending inventories and the cost of goods sold Cost allocation A procedure that distributes a common cost among the items giving rise to the cost Cost center Organizational unit that has control over and is accountable for costs incurred in offering products or services Cost driver Attributes that we can measure for each cost object that are used to distribute the cost pool among cost objects Cost gap The difference between the current cost and the allowable cost Cost hierarchy The classification of costs into unit-, batch-, product-, and facility-level Cost leadership A strategy of competing on the basis of cost advantages Cost objects The items, or entities, to which costs are to be allocated Cost of capital The opportunity cost of money in the form of returns from alternate investments Cost of goods manufactured (COGM) The cost of items finished and transferred from work in process inventory to finished goods inventory Cost of goods sold (COGS) The cost of products sold in a period The cost of items transferred from finished goods inventory to the income statement Cost pool The total costs to be allocated Cost structure The proportion of total costs that are fixed and variable Critical success factors (CSF) Things that must “go right” for the organization to be successful Cross-subsidization Some cost allocation systems allocate systematically lower amounts to some products and higher amounts to allocate other products In such instances, products receiving higher allocations are said to crosssubsidize products receiving lower allocations Current cost The cost of new product as per current configurations and production technologies Customer perspective One of the four perspectives in the balanced scorecard This perspective ensures that the organization considers the customer’s viewpoint Customer planning The set of decisions to assess the profitability of individual customers and customer segments, including the actions taken to improve their profitability Decentralization The practice of delegating authority to lower-level managers Decentralized decision making An organizational setting where decision-making authority is dispersed throughout the firm Decision Choosing an option from a set of options to achieve a goal Decision framework A four-step process that consists of specifying the decision goals, identifying available options, evaluating these options, and then selecting the option that best meets the decision maker’s goals Denominator volume Same as “allocation volume.” Departmental rates The use of many rates, usually one per department, for allocating capacity (overhead) costs to products Direct cost, direct benefit A cost or benefit that is uniquely related to a decision option Direct costing Term frequently used to refer to “variable costing.” Direct labor Labor costs than can be traced to individual units of a product in a cost-effective manner Direct materials Materials costs than can be traced economically to individual units of a product Direct method An allocation procedure that ignores the relationship among support activities and focuses instead on the relationship between support and line activities Discount factor The amount by which a future cash flow is multiplied to obtain its present value Discount rate The rate of return employed to compute the present value of future cash flows Discounting The practice of expressing a future cash flow in terms of its present value Discretionary cost center A cost center for which there is no clear relation between inputs and outputs Dual-rate allocations A procedure that employs two separate drivers to allocate fixed and variable costs in a cost pool DuPont model A method for decomposing ROI into two component parts: profit margin and asset turnover Economic value added (EVA) A performance measure similar to residual income The difference is that EVA has specific guidelines on how to compute income, investment, and the weighted average cost of capital Engineered cost centers Cost centers for which there is a clear relation between inputs and outputs Find more at http://www.downloadslide.com Glossary 663 Excess capacity/Excess supply A condition that obtains when available capacity exceeds realized demand Excess demand A condition that obtains when realized demand exceeds available capacity Facility-level activities Activities that are required to sustain the business Facility-level cost Cost that does not vary at the unit-, batch-, or product-level Cost required to sustain the organization Favorable variance A difference between an actual result and a budgeted amount that leads to an increase in profit Financial accounting Accounting information system that aims to meet the needs of decision makers outside the organization Financial budgets Budgets quantifying the outcomes of operating budgets in summary financial statements Financial measures Metrics that rely on data recorded in a firm’s accounting system Financial perspective One of the four perspectives in the balanced scorecard This perspective ensures that the organization meets its ultimate goals Fixed cost A cost that does not change as the volume of activity changes Fixed manufacturing overhead Indirect manufacturing costs that not vary with production volume Fixed overhead Indirect manufacturing costs that not vary with production volume Flexible budget A budget made for the actual level of sales, retaining all other plan assumptions in the master budget Flexible budget variance The difference between actual profit and flexible budget profit Full costing Term frequently used to refer to “absorption costing.” Goals Objectives that decision makers try to achieve Gross margin Revenues less product costs High-low method A cost estimation technique that uses two observations pertaining to the highest and lowest activity levels to estimate fixed and variable costs Hurdle rate Minimum required rate of return chosen by management Often exceeds the cost of capital Incremental (differential) approach An approach for framing and solving decisions that involves expressing the benefits and costs of the various decision options relative to one of the options Indirect cost, indirect benefit A cost or benefit that is not unique to a decision option—only a portion relates to a decision option Informativeness principle The notion that any metric that provides information about a manager’s effort or skill could be a useful performance measure Initial outlay All costs connected with purchasing an asset and getting it ready for its intended use Innovation and learning perspective One of the four perspectives in the balanced scorecard This perspective ensures that the organization does not stagnate and has mechanisms that allow it to grow and stay competitive Input price variance Profit effect associated with the difference between the budgeted and actual price of an input Input quantity variance Profit effect associated with the difference between the budgeted and actual input quantity used Internal business perspective One of the four perspectives in the balanced scorecard This perspective ensures that the organization’s processes are aligned with its customer and financial goals Internal rate of return (IRR) The discount rate at which a project’s net present value is zero Inventoriable costs See Product costs Investment center Organizational unit that has control over and is accountable for revenues, costs, and long-term investment decisions Job shop Setting that involves discrete production of unique products Joint cost A cost that is common to two or more products Costs of a joint process Joint product Products that are produced in a joint process It is not possible to produce one joint product without producing the others as well Kaizen Philosophy of continuous improvement Labor efficiency variance See Input quantity variance Labor rate variance See Input price variance Lagging measures Measures that reflect past performance Leading measures Measures that capture the drivers of future performance Life-cycle analysis A technique that partitions a product’s life into discrete stages and thereby guides efforts toward pricing and cost control Line activity An activity that is directly related to making and selling the firm’s products and services Lumpy resource Resources for which it is difficult to match the demand for capacity with the supply Managerial accounting Accounting information system that aims to meet the needs of decision makers inside an organization Manufacturing firm A firm that uses labor and equipment to transform inputs such as materials and components into outputs Manufacturing overhead The sum of all indirect manufacturing costs Margin of safety The percentage by which current sales exceed breakeven sales Market share variance The profit effect due to differences between the actual and budgeted share of the market for a product Market size variance Profit effect due to differences between the actual and budgeted size of the market for a product Master budget Comprehensive set of operating and financial budgets Master budget The budget as prepared at the start of the accounting period Find more at http://www.downloadslide.com 664 Glossary Materials efficiency variance See Input quantity variance Materials price variance See Input price variance Merchandising firm A firm that resells essentially the same product it buys from suppliers Mixed cost A cost that contains both fixed and variable components Modified payback method/period The length of time it takes to recoup the initial investment using discounted cash flows Net present value (NPV) The present value of all of the cash flows associated with a resource Nonfinancial measures Measures that employ data not in the firm’s accounting system Normal costing A product-costing system that uses predetermined overhead rates to apply overhead to products Operating budgets Budgets reflecting the collective expression of numerous short-term decisions that conform to the direction set by long-term plans Operating leverage The ratio of fixed costs to total costs (total costs ϭ fixed costs plus variable costs) Operations costing A combination of job costing and process costing Opportunity cost The value of the next-best option Organization A group of individuals engaged in a collectively beneficial mission Organization chart A graphical representation of the hierarchical relations among positions in an organization Overapplied overhead The difference between actual overhead and applied overhead Arises when actual overhead is smaller than applied overhead Overhead The costs of capacity resources Overhead Same as manufacturing overhead Overhead costs Term frequently used to refer to “capacity costs.” Overhead rate Term frequently used to refer to “allocation rate.” Payback method/period The length of time it takes to recoup the initial investment using undiscounted cash flows Period costs A financial accounting concept under GAAP Any cost that is not a product cost A cost related to the selling of goods and the administration of the organization Planning decisions Decisions about acquiring and using resources to deliver products and services to customers Plant-wide rate The use of one rate for the entire company when allocating capacity costs (overhead) to products Practical capacity A realistic estimate of the maximum possible activity level Predetermined overhead rate Overhead rate computed using expected overhead costs and expected activity volumes at the start of a plan period, typically a year Present value The value today of a future cash flow Prime costs The sum of direct materials and direct labor costs, as these are the primary inputs into the production process Process shop Setting that involves continuous production of homogeneous products Product costs A financial accounting concept under GAAP Any cost associated with getting products and services ready for sale Product mix The proportion, expressed in units, in which products are expected to be sold Product planning The set of decisions about which products to offer and their prices Product-/customer-level activities Activities that relate to a specific product or a specific customer Product-level cost A cost that varies in proportion to the number of products Profit center Organizational unit that has control over and is accountable for both revenues and costs Profit margin Contribution margin less allocated capacity costs Profit margin Contribution margin less the controllable cost of capacity resources Purchase price variance The difference between the budgeted and actual price of materials multiplied by the actual quantity of materials purchased Real option analysis A collection of mathematical techniques for valuing the flexibility associated with a project Reciprocal method An allocation procedure that fully accounts for the relationship among support activities Reciprocity in consumption A consumption pattern in which two departments provide services to each other Regression analysis A statistical method that uses all available observations to estimate fixed and variable costs Relative performance evaluation The practice of measuring a manager’s or a division’s performance against other managers or divisions Relevant cost analysis See Incremental (differential) approach Relevant cost, relevant benefit A cost or benefit that differs across decision options Relevant range A firm’s normal range of operations Over this range, we expect a stable relation between activity and cost Residual income (RI) The income that a division generates over and above the required rate of return on investment Resource planning Decisions that pertain to improving the efficiency and effectiveness of organizational processes Responsibility accounting Set of concepts pertaining to decision rights and performance evaluation in decentralized organizations Responsibility center An organizational subunit Responsibility center An organizational subunit with specified decision rights There are three common forms of responsibility centers: cost centers, profit centers, and investment centers Return on investment (ROI) A measure of profit generated per dollar of investment—equals divisional operating income divided by divisional investment Sales mix variance Used in multiproduct firms, it captures the effect of changes in the sales mix from the budgeted level Sales price variance The difference between actual revenues and flexible budget revenues Find more at http://www.downloadslide.com Glossary 665 Sales quantity variance Used in multiproduct firms, it captures the effect of an aggregate change in sales quantity, holding the sales mix at the budgeted level Sales volume variance The difference in profit between the flexible budget and the master budget Salvage value The final one-time costs or benefits associated with disposing of a resource Segment (product) margin The contribution margin of a segment (e.g., product, customer, geographical region) less traceable fixed costs Self-consumption A support department consuming its own output Selling and administration costs Nonmanufacturing costs A term frequently used to refer to “period costs.” Sequential allocation See Step-down method Service firm A firm whose product is neither tangible nor storable Shareholder value The long-run expected wealth potential of an organization to its shareholders Spending variance The difference between budgeted fixed costs and actual fixed costs Split-off point Step in a joint process after which we can identify and process the joint products separately Step cost A cost that increases in discrete steps as the volume of activity increases Step-down method An allocation procedure that partially accounts for the relationship among support activities Strategy Approach for creating and sustaining its value proposition Sunk cost A past expenditure that cannot be changed Support activity An activity that is not a line activity These activities help the firm execute the line activity Target costing A technique for cost planning during product design and development Time value of money Phrase used to denote that a dollar today is worth more than a dollar tomorrow Top-down budgeting A process by which top management sets the budgets Total manufacturing costs charged to production The sum of materials, labor, and overhead added to the work-inprocess account during the period Total profit variance The difference between actual profit and master budget profit Totals (gross) approach An approach that includes noncontrollable costs and benefits to construct a contribution margin statement for each decision option Traceability The degree to which we can directly relate a cost or a revenue to a decision option Transfer price A notional price paid for an internal transfer of goods or services Treasurer The person in an organization who manages cash flows and serves as the contact point for banks, bondholders, and other creditors Two-factor allocation See Dual-rate allocation Underapplied overhead The difference between actual overhead and applied overhead Arises when actual overhead is larger than applied overhead Unfavorable variance A difference between an actual result and a budgeted amount that leads to a decrease in profit Unit contribution margin The contribution margin per unit Unit-level activities Activities that are proportional to production volume Unit-level cost A cost that increases or decreases in direct proportion to the number of units produced (used synonymously with variable cost) Value The benefits less the costs of a decision option Value chain Set of logically sequenced activities that together execute the chosen business strategy Value differentiation A strategy of competing on the basis of providing customer value through innovation and service Value proposition The key source of customer value provided by an organization Variability The relation between a cost or a benefit and an activity Variable cost A cost that is proportional to the volume of activity Variable costing A method that separates variable costs from fixed costs Under this method, the cost of a unit of product in inventory includes only variable manufacturing costs, such as direct materials, direct labor, and variable manufacturing overhead Variable overhead Indirect manufacturing costs that vary with production volume Variance The difference between an actual result and a budgeted amount Variance analysis Technique for determining why actual revenues, costs, and profit differ from their budgeted amounts Weighted contribution margin ratio Contribution margin ratio averaged across multiple products, with each product’s contribution margin ratio being weighted by its share of revenues (which is a function of both the product mix and prices) Weighted unit contribution margin Unit contribution margin averaged across multiple products, with each product’s unit contribution margin being weighted by the product mix (i.e., its share of total sales in units) Whale curve A curve that plots customer profitability, after ranking customers in order of their profitability Has the appearance of a “whale.” Find more at http://www.downloadslide.com This page intentionally left blank Find more at http://www.downloadslide.com Index A ABC, see Activity-based costing ABM, see Activity-based management “Above the line” costs, 77 Absorption costing, 364–368 defined, 364 variable costing vs., 367–368, 376–379 Accenture, 77, 541 Account classification method (of cost estimation), 116–118 Accounting: financial, 12–14 managerial, 13–14 professional organizations, 20–21 responsibility, 277, 278 Accounting rate of return (ARR), 462, 463 Activities, 404–406 batch-level, 405, 406 customer-level, 405, 406 facility-level, 405, 406 line, 636 non-value-adding, 420 product-level, 405, 406 support, 636–646 unit-level, 404–406 value-adding, 420 Activity-based costing (ABC), 400–421 computing product costs, 410–412 and deciding which costs to allocate, 407–408 decision making with, 414–415 defined, 404 denominator volume in, 409–410 drawbacks to, 416 elements of, 402–404 forming cost pools, 404–407 identifying cost drivers, 408–409 management with, see Activity-based management reports from, 412–414 transfer pricing vs., 508 Activity-based management (ABM), 416–420 customer planning, 416–419 product planning, 416 resource planning, 419–420 Activity hierarchy, 404–406 Activity levels, for high-low method, 120 Actual input costs, 316, 318 Aeropostale, 563 AEUB (Alberta Energy and Utilities Board), 644 AICPA, see American Institute of Certified Public Accountants AIRCO, 410 Airline industry, 47 Air Products & Chemicals, 417 AirTran, 548 Alberta Energy and Utilities Board (AEUB), 644 Alcoa, 85, 579 Allocations: of capital, see Capital allocations of costs, see Cost allocations Stage 1, 407 Stage 2, 410–412 of time, 214–217 Allocation basis, 88 See also Cost drivers Allocation rate, 88–89, 358 departmental, 363 plantwide, 363 Allocation volume, 88–90 Allowable costs, 545, 557–558 Amazon.com, 122, 255, 468, 549 Ameren, 203 American Bar Association, American Institute of Certified Public Accountants (AICPA), 16, 20–21 Amoco, 222 Amtrak, 53 Annuities, 472 AOL, 562 Apple Computer, 48, 72, 84, 203 Applied overhead, 587 Arnold & Porter, 579 ARR, see Accounting rate of return Art.com, 56 “As if” budgets, 316–317 Asset turnover, 501, 502 Assumptions: about product mix, 177 of classifying costs without hierarchy, 53–54 of cost estimations, 127 cost flow, 79, 282–284 for Cost-Volume-Profit (CVP) analysis, 177–178 of high-low method, 122 of Internal rate of return (IRR), 459 in net present value (NPV), 457, 458 of regression analysis, 125 Australian Stock Exchange (ASX), 320 Automotive industry: high hurdle rates in, 467 product planning in, 416 Avoidable fixed costs, 224–225 B Balanced scorecard, 551–555 components of, 552–554 defined, 551 Balanced Scorecard Collaborative, 552 Bank of America, 9, 79 Batch-level activities, 405, 406 Batch-level costs, 54–56 Baxter Healthcare, 46 Beginning finished goods inventory, 265 Behavior, and incentives, 371, 372–373 “Below the line” costs, 77 Benchmarks: budgets as, 256, 495–498 setting, for efficiency, 420 Benchmarking, 469 Benchmark options, 209, 211 Benefits: controllable, 42–49 of decentralization, 491 direct, 52, 53 estimating, 49–53 identifying, 42 indirect, 52 measurement of, 6–7 noncontrollable, 42 nonfinancial, 467 relevant, 42–45 of short-term decisions, 218–220 traceability of, 52–53 variability of, 50–52 Bennett Brothers Yachts, 584 Best Western, 536 BHP Billiton, 222 Find more at http://www.downloadslide.com 668 Index Bidis, 198 Biogen, 469 Blue Cross, 38 Blue Shield, 38 BMW, 416 Boeing, 546 Boggs, P.B., 325 Bose Electronics, 14 Bottom-up budgeting, 278–279 Breakeven revenues, 161 Breakeven volume, 158–160 Breyers, 50 Brisbane, Australia, 552 British Petroleum, 373 Budgets and budgeting, 254–276 “as if” budgets, 316–317 bottom-up budgeting, 278–279 budgets as benchmarks, 256, 495–498 capital, see Capital budgets and budgeting cash, 270–276 with changes in materials prices, 282–284 control with, 306–307 cost flow assumptions in, 282–284 defined, 254 direct labor budgets, 262–263 direct materials purchase budgets, 272–273 direct materials usage budgets, 260–262 financial budgets, 254, 255 flexible budgets, 310–312 incremental approach to, 280 influences on, 276–280 manufacturing overhead cost budgets, 263–264 marketing/administrative costs budgets, 266–268 master budgets, 255, 258–269 municipal budgets, 279 operating budgets, 254, 255, 449 participative budgeting, see Bottom-up budgeting production budgets, 258–260 purposes of, 254–258 revenue budgets, 258 top-down budgeting, 278, 279 usage budgets, 260–264 variable cost of goods manufactured budgets, 264–265 variable cost of goods sold budgets, 265–268 Budgeted income statements, 268, 269 Budgeted unit contribution margin, 312 Budget reconciliation reports, 319 Burden, 359 Burger King, 29 Business processes, 404, 420 Business Week, 495, 562 C California, 160 Canon, 545, 552 Capacity, 202 as limitation of CVP analysis, 178 practical, 409 unused, 409–410, 422–423 Capacity costs, 83 activity-based costing for, see Activitybased costing controllability of, 373, 374 cost allocation estimation of, 358–364 direct estimation of, 357–358 Capacity resources: controllability of, 46–48 lumpy nature of, 449 Capital allocations, 466–469 Capital budgets and budgeting, 446–470 accounting rate of return in, 462, 463 allocating capital in, 466–469 capital budgeting defined, 448 discounted cash flow techniques, 454–459, 462–463 internal rate of return in, 458–459, 462–463 modified payback in, 461–463 net present value in, 454–459, 462–463 payback method in, 460, 463 and project cash flows, 450–454 real options analysis in, 468 strategic impact of projects, 467–468 and taxes, 463–466 Cash budgets, 270–276 defined, 270 determining financing needs with, 275–276 inflow from operations, 271–272 net cash flow from operations, 274 outflow from operations, 272–274 special items, 275 Cash flows: in capital budgeting, 450–454 and depreciation, 453 and IRR, 458, 459 for operations, 271–274 present value of, 448–449, 471–475 Caterpillar, 85, 578 Centralized decision-making, 256 Century 21 (company), 10 CEO, see Chief executive officer Certified Financial Manager (CFM), 20 Certified Internal Auditor (CIA), 21 Certified Management Accountant (CMA), 20 Certified Public Accountants (CPAs), 20–21 CFM (Certified Financial Manager), 20 CFO, see Chief financial officer Chicago Cubs, 29 Chicago Sun-Times, 202 Chief executive officer (CEO), 19–20 Chief financial officer (CFO), 19, 20 Chief internal auditor (CIA), 19, 20 Chipotle, 448 Chrysler, 171, 467 CIA, see Certified Internal Auditor; Chief Internal Auditor Cigna, 38 Citibank, 405, 417 Citigroup, 16, 497 Citizen Watch, 373 CMA (Certified Management Accountant), 20 Coca-Cola Company, 173 Code of Ethics (IMA), 16, 22–24 Coefficients, regression, 125 COGM, see Cost of goods manufactured COGS, see Cost of goods sold Colorado Avalanche, 29 Coming to America (film), 90 Common costs, 52 Compaq, 535 Competitive landscape, 535–536 Conflicts, 257, 258 Contexant, 562 Continental Airlines, 547 Contracts, 368–370 Contribution margins, 112, 128 budgeted unit, 312 incremental, 208–209 maximizing, per unit of capacity, 215–217 in multiproduct CVP analysis, 172–175 unit, 156 Contribution margin ratio, 161 Contribution margin statements, 112–116 cost estimation with, 112–116 in decision-making, 113–114 defined, 112, 113 estimating cost structure with, 114–116 partial, 209 See also Gross approach segmented, 128–130 Control: with budgets, 306–307 budgets for, 254, 256–257, 306, 307 nonfinancial, 323–326 variance analysis for, 319–323 Control accounts, 83, 584 computing total amount in, 591–592 zeroing, 591–594 Control decisions, 11–12 Controllable costs and benefits, 42–49 relevant, 42–45 and time horizon, 46–49 Controllable performance measures, 494 Controller, 19, 20 Conversion costs, 83, 616 Cooper, Robin, 359, 373 Coordination: budgets for, 254, 256 of decentralized decisions, 492 Core competency, 534 Costs, 74–76 “above the line,” 77 actual input, 316, 318 allowable, 545 avoidable fixed, 224–225 batch-level, 54–56 “below the line,” 77 capacity, see Capacity costs common, 52 controllable, 42–49 conversion, 83, 616 current, 545 of decentralization, 491–492 direct, 52–53 direct labor, 82 direct materials, 82 estimating, see Cost estimation facility-level, 55, 56 fixed, 50, 224–225 hierarchical structure of, 53–56 identifying, 42 incremental, 206–208 Find more at http://www.downloadslide.com Index 669 indirect, 52–53 inventoriable, 83 joint, 222–223 labor, 82, 585 marginal, 51 materials, 82, 583–584 measurement of, 6–7 mixed, 50 noncontrollable, 42, 210–211 opportunity, 6–7 overhead, 359, 378 See also Capacity costs period, 76–77 prime, 83 product, 76–77, 410–412 product-level, 55, 56 relevant, 42–45 selling and administration, 83 step, 53–56 sunk, 45–46 traceability of, 52–53, 580 unallocated activity, 409–410 unit-level, 54–56 of unused capacity, 409–410, 422–423 variability of, 50–52 variable, 50 Cost accounting systems, see Job costing; Process costing Cost allocations, 88–93, 354–375 for activity-based costing, 407–408 based on activities, see Activity-based costing controllability and traceability as drivers of, 373, 374 in decision making, 91–92, 356–364, 637–638 defined, 88 direct method, 639–641 drawbacks to, for long-lived resources, 448–449 dual-rate, 646–647 excluding costs from, 363 to influence behavior, 371, 372–373 to justify prices and reimbursements, 368–371 in long-term decision making, 356–364 with multiple cost pools and cost drivers, 361–363 with predetermined overhead rates, 645, 646 reciprocal method, 643–645 for reporting income, 364–368 step-down method, 641–643 of support activities, 638–646 two-factor, 649 See also Dual-rate cost allocations two-step procedure for, 88–91 Cost-based transfer prices, 508, 509 Cost centers, 277, 492–493 discretionary, 496 engineered, 496 performance measurement in, 495–496 Cost drivers: for activity-based costing, 408–409 defined, 88 for dual-rate cost allocations, 647 multiple, 361–363 selection of, in cost allocation, 89–91 Cost estimation, 49–53, 110–131 account classification method of, 116–118 assumptions of, 127 with contribution margin statements, 112–116 high-low method of, 118–123 learning curves in, 132–133 with regression analysis, 123–128 with segmented contribution margin statements, 128–130 selecting method for, 126–128 traceability in, 52–53 variability in, 50–52 Cost flows: assumptions of, 79, 282–284 for job costing, 580–591 in manufacturing organizations, 81–87 in merchandising organizations, 78–81 in service organizations, 77–78 for support activities, 637–639, 642 Cost gaps, 545 Cost hierarchy, 53–56 Costing: absorption, see Absorption costing activity-based, see Activity-based costing direct, 365 job, see Job costing normal, 587 process, see Process costing standard, 620–621 target, 544–546 variable, 365, 367–368, 376–379 Cost leadership strategies, 536–538, 541–542 Cost objects, 88–91 Cost of capital, 451, 453, 454 Cost of goods manufactured (COGM), 85 in job costing, 588–589 in process costing, 614–617, 620, 621 variable cost of goods manufactured budget, 264–265 Cost of goods sold (COGS), 79, 85 charging overhead to, 592–594 in job costing, 589–591 variable cost of goods sold budget, 265–268 Cost planning strategies, 542–546 life-cycle analysis, 542–544 target costing, 544–546 Cost pools, 88–90 for activity-based costing, 404–407 for dual-rate cost allocations, 647 multiple, 361–363 for process costing, 616–618 Cost structures, 114–116 Cost-Volume-Profit (CVP) analysis, 154–179 assumptions underlying, 177–178 creating CVP relation, 156–158 decision making with, 164–166, 175–177 evaluating operating risk with, 166–171 multiproduct analysis, 171–177 profit planning with, 158–163 CPAs, see Certified Public Accountants Credit policies, 271, 272 Credit scoring, 126 Critical success factors (CSFs), 325, 547–551 defined, 547 operational vs strategic, 548 properties of, 548–550 Crossover volume, 169 Cross-subsidization, 414 CSFs, see Critical success factors Culture (organizational), 16 Current costs, 545, 558 Current value, 499 Customer-level activities, 405, 406 Customer perspective (balanced scorecard), 553 Customer planning, 416–419 Customers, unprofitable, 418 CVP analysis, see Cost-Volume-Profit analysis CVS Pharmacy, 580 D DCF techniques, see Discounted cash flow techniques Decentralization, 490 Decentralized decision making, 256, 490–494 benefits of, 491 and budgeting, 276–278 and cost allocation rates, 637–638 costs of, 491–492 responsibility centers in, 492–494 Decisions, control, 11–12 make-versus-buy, 212–214 planning, 10–12 short-term, see Short-term decisions time horizons for, 46–49 Decision Framework, 4–8, 15 Decision making, 2–18 about price, 164–166 accounting in, 12–15 with activity-based costing, 414–415 centralized, 256 choosing the highest value option, 7–8 contribution margin statements in, 113–114 cost allocations in, 91–92, 356–364, 637–638 with Cost-Volume-Profit analysis, 164–166, 175–177 decentralized, see Decentralized decision making ethics in, 15–17 framework for, 4–8 identifying options in, measuring benefits and costs in, 6–7 in organizations, 8–10 for planning and control, 10–12 specifying problems in, 4–5 Decline stage (product life cycle), 543, 544 Defense Working Capital Fund (DWCF), 593 Delegation, 276–277, 491 Dell Computers, 50, 254, 535, 536, 540, 549 Delta, 10 Deluxe Checks, 54–55 Demand: seasonal, 204 and supply, 202–205 Find more at http://www.downloadslide.com 670 Index Denominator volume, 88, 409–410 See also Allocation volume Departmental rate (cost pools), 363 Department of Defense (DoD), 368, 593 Depreciation: and cash flows, 453 considerations of, in ROI, 499 Depreciation tax shield, 464 Des Moines Register, 420 Development stage (product life cycle), 543 See also Target costing Differential method (of cost analysis), 209 See also Relevant cost analysis Direct benefits, 52, 53 Direct costs, 52–53 Direct costing, 365 Direct estimation, of capacity costs, 357–358 Direct labor, 82, 585 Direct labor budgets, 262–263 Direct labor price variances, see Labor rate variances Direct materials costs, 82 Direct materials purchase budget, 272–273 Direct materials usage budget, 260–262 Direct method (of cost allocation), 639–641 Discounted cash flow (DCF) techniques, 454–459, 462–463 Discount factor, 455 Discounting (term), 448–449 Discount rate, 453–456 Discretionary cost centers, 496 Disney, 536 DoD, see Department of Defense Dollars for Scholars, 107 Doubling approach, 132 Dow Chemical, 504 Downsizing staff, 357 DreamWorks, 50 Dual-rate cost allocations, 646–647 Duke Children’s Hospital, 552 DuPont model (of ROI), 501, 502 DWCF (Defense Working Capital Fund), 593 E Earnings before interest and taxes (EBIT), 504 Earnings per share (EPS), 504 EBay, 255 EBIT (earnings before interest and taxes), 504 Economic value added (EVA), 503–506 Electrical utilities, 644 Electronics recycling program, 45 Employees: delegation to, 276–277, 491 empowerment of, by decentralization, 491 influencing behavior of, with cost allocation, 371, 372–373 involvement of, in budgeting, 278–279 Ending finished goods inventory, 266 Engineered cost centers, 496 Enron, 10 Environments (production), 578–580 Epcor, 644 EPS (earnings per share), 504 Equipment, replacement of, 466 Equivalent units, 614–615 Ethics, 15–17 EVA, see Economic value added Excel, creating regression lines in, 123–125 Excess capacity, 202–205, 211–212 Excess demand, 202–205, 212–214 Excess supply, 202–205 See also Excess capacity Expedia, 563 Experian, 126 F Facility-level activities, 405, 406 Facility-level costs, 55, 56 Famous Footwear, 346–347 FASB, see Financial Accounting Standards Board Favorable (F) variances, 308–309 Federal Energy Regulatory Commission, 215 Federal Reserve Bank, 368 FedEx, 547 Feedback, 256, 324 FG inventory account, see Finished goods inventory account FIFO (First-In-First-Out), 79 Financial accounting, 12–14 Financial Accounting Standards Board (FASB), 13, 14, 76, 423 Financial budgets, 254, 255 Financial measures, 547 Financial perspective (balanced scorecard), 552, 553 Financial Times, 562 Financing, determining need for, 275–276 Finished goods (FG) inventory account, 84, 85, 87 in job costing, 590–591 prorating overhead to, 594 First-In-First-Out (FIFO), 79 FirstUSA, 417 Fisher (audio company), 416 Fixed costs, 50 avoidable, 224–225 estimating, see Cost estimation Fixed cost spending variance, 314, 315 Fixed manufacturing overhead, 587 Fixed overhead, 83 Flexibility, of investments, 468 Flexible budgets, 310–312 Flexible budget cost, 315, 316, 318 Flexible budget quantity, 315, 318 Flexible budget variances, 310–318 defined, 312 fixed cost spending variance in, 314, 315 graphing, 312, 313 sales price variance in, 314 variable cost variances, 315–318 Florida Keys, 246 Foley’s, 448 Ford Fusion, 174 Ford Motor Company, 82–83, 184, 467 Ford Mustang, 174 Foreign Corrupt Practices Act of 1977, 15, 16 Forrest Gump (film), 90 Frigidaire, 52 Full costing, 377 See also Absorption costing Fulton County Schools, 552 Functional analysis, 558 Future value, calculating, 471–475 F variances, see Favorable variances G GAAP, see Generally Accepted Accounting Principles Game Theory, 220 Gap, 53, 579 Gates Foundation, 127 Gateway, 50, 51 General Electric Corporation, 9, 139 Generally Accepted Accounting Principles (GAAP), 13, 14, 402 and absorption costing, 364, 365 for cost of unused capacity, 423 income statements using, 76–77 matching principle of, 77, 378 for research and development, 504 General Mills, 623 General Motors, 9, 118, 357, 450, 498 Georgia Pacific, 506, 507 Global sourcing, 81 Goals: aligning, 9–10, 326 and budgets, 279–280 and decentralization, 492 individual, 4–5 organizational, 8–9 Goldratt, Eli, 218 Google, 9, 50, 562 Grants (research), 118 Graphing: historical cost data, 114–116 sales volume and flexible budget variances, 312, 313 Greens fees, 204 Greyhound, 53 Gross approach (to cost analysis), 210–212 Gross book value, 499 Gross margin, 76, 77 Gucci, 536, 563 H Habitat for Humanity, Hard measures, 551 Heritage Farms, 222–223 Hewlett-Packard (HP), 45, 203, 259, 490, 535, 536 High-low method (of cost estimation), 118–123 assumptions of, 122 calculating, 120–121 defined, 118 error in, 122–123 true cost line in, 119 Hilton Hotels, 552 Honda, 467 Hoover, 324 HP, see Hewlett-Packard Human Resources Departments, 262, 263 Hurdle rate, 466 Find more at http://www.downloadslide.com Index 671 I IBM, 9, 46, 451, 541 IIA, see Institute of Internal Auditors IMA, see Institute of Management Accountants Incentives, 368–374 Income reporting: cost allocations for, 364–368 with variable costing vs absorption costing, 378–379 Income statements: absorption costing, 366–368 budgeted, 268, 269 and cost allocations, 91–92 GAAP for, 76–77 of manufacturing firms, 85–87 of merchandising firms, 80–81 product-level, 360 of service firms, 77–78 with two-pool allocated costs, 363 variable costing, 365, 366 Incremental approach, to budgeting, 280 Incremental contribution margin, 208–209 Incremental costs, 206–208 Incremental method (of cost analysis), 209 See also Relevant cost analysis Incremental profit, 206–208 Incremental revenues, 206–208 Indirect benefits, 52 Indirect costs, 52–53 Indirect labor, 585 Informativeness principle, 494 Infosys, 49, 541 Initial outlay, 450, 451 Innovation and learning perspective (balanced scorecard), 553, 554 Input efficiency variances, see Input quantity variances Input price variances, 316–318 Input quantity variances, 317–318 Institute of Internal Auditors (IIA), 16, 21 Institute of Management Accountants (IMA), 16, 20, 22–24, 416 Institutional sales, 211 Intel, 133, 540 Intercept, of regression line, 125 Internal business perspective (balanced scorecard), 553 Internal markets, 259 Internal rate of return (IRR), 458–459, 462, 463 assumptions in, 459 defined, 458 net present value vs., 459 Internal Revenue Service (IRS), 12, 507 International Accounting Standards Board, 13 Intra-company business transactions, see Transfer pricing Introduction and growth stage (product life cycle), 543, 544 Inventoriable costs, 83 Inventory: beginning, 619–620 beginning finished goods, 265 ending finished goods, 266 equation for, 79 finished goods, see Finished goods inventory account layers of, 79 materials inventory account, 83, 87 for merchandising firms, 78–79 in production budgets, 258–260 in service firms, 80 Investment centers, 278, 493, 494, 498–506 IRR, see Internal rate of return IRS, see Internal Revenue Service J JCPenney, 78, 164 JetBlue, 77 Job costing, 576–595 cost flows for, 580–591 and cost of goods manufactured, 588–589 and cost of goods sold, 589–591 labor costs in, 585 manufacturing overhead in, 586 materials in, 583–584 and overapplied/underapplied overhead, 591–594 predetermined overhead rates in, 587 process costing vs., 578–580 Job shop, 579 John Deere, 174, 374, 493, 506 Johnson & Johnson, 27, 130, 450, 498 Joint costs, 222–223 Joint processes, 222, 223 Joint products, 222–223 K Kaiser Permanente, 38 Kaizen, 496 Kauffman Foundation, 118 Kellogg Company, 579 Key performance indicators (KPIs), 547 Kinko’s, 79 Kleenheat Gas, 320 Kodak, 255 Komatsu, 373 KPIs (key performance indicators), 547 Kroger, 78, 539 L Labor: in cash budgets, 273, 274 direct, 82, 585 direct labor budget, 262–263 indirect, 585 in job costing, 585 Labor efficiency variances, 317, 318 Labor quantity variances, see Labor efficiency variances Labor rate variances, 317, 318 Lagging measures (lag measures), 505, 546 Last-In-First-Out (LIFO), 79 Launch (product), 558 Leading measures, 546 Learning curves (cost estimation), 132–133 Lehigh Steel, 374 Let’s Make a Deal! (television show), Lever Brothers, 468 Life-cycle analysis, 542–544 Life expectancy (of assets), 451–452 LIFO (Last-In-First-Out), 79 Line activities, 636 Lions Club, 566 Lions Eye Bank, 566 London School of Business, 562 Lord Corporation, 406 Los Angeles Lakers, 202 Loyalty programs, 408 Lucent Technologies, 534 Lufthansa, 548 Lumpy resources, 449 M McDonald’s, 10, 29 MACRS (Modified Accelerated Cost Recovery System), 465 Macy’s, 324, 563 “Make-to stock” production, 579 Make-versus-buy decisions, 212–214 Management: activity-based, see Activity-based management cost allocations in, 371 open-book, 14 styles of, and budgeting, 278–279 supply chain, 81 Managerial accounting, 13–14 Manufacturing firms, 81–87 cost flows in, 81–87 See also Job costing; Process costing cost terminology for, 82–83 defined, 81 income statements from, 85–87 production process in, 83–85 Manufacturing overhead, 82–83, 263, 264, 586 in cash budgets, 273–274 fixed, 585 Manufacturing overhead cost budget, 263–264 Marginal costs, 51 See also Variable costs Margin of safety, 167–169 Market-based transfer prices, 509 Marketing and administrative costs: budget, 266–268 in cash budget, 274 Market research, 558 Market segments, 416–419 Market share variance, 329–330 Market size variance, 329–330 Market value, 504 Marriott, 77 Massachusetts General Hospital, 368 Master budgets, 258–269 budgeted income statements in, 268–269 defined, 255 and direct labor budget, 262–263 and direct materials usage budget, 260–262 flexing, 310 and manufacturing overhead cost budget, 263–264 and marketing/administrative costs budget, 266–268 and production budget, 258–260 and revenue budget, 258 Find more at http://www.downloadslide.com 672 Index and variable cost of goods manufactured budget, 264–265 and variable cost of goods sold budget, 265–268 Matching principle (of GAAP), 77, 378 Materials, costs for, 583–584 Materials efficiency variances, 317 Materials inventory account, 83, 87 Materials price variances, 317 Mattel, 325 Mattress Firm, 164 Maturity stage (product life cycle), 543, 544 Maximum transfer price, 512–515 Maytag, 324 Measurement: of benefits and costs, 6–7 of critical success factors, 325 of performance, 494–510, 546–547 Media-Markt, 45 Medicaid, 38, 39 Medicare, 38, 39 Membership clubs, 408 Mercedes, 416 Merchandising firms, 78, 79 cost flows in, 78–81 income statements for, 80–81 inventory equation for, 79 Merck, 469 Mergers, 535 Metropolitan Museum of Art, 27 Miami Heat, 29 Microsoft, 9, 27, 118, 184, 494, 497 MidAmerican Energy, 422 Minimum transfer price, 512–515 Mining industry, 452 Mission statements, Mitsubishi, 62 Mixed costs: defined, 50 estimating, see Cost estimation MNCs (multi-national corporations), 509 Modified Accelerated Cost Recovery System (MACRS), 465 Modified payback method (of capital budgeting), 461–463 Monsanto, 422 Morale, employee, 127 Morningstar, 495 Motorola, 84, 417 Movie industry, 90 Multi-national corporations (MNCs), 509 Multiproduct CVP analysis, 171–177 about, 171–172 weighted contribution margin ratio method, 174–175 weighted unit contribution margin method, 172–174 Municipal budgeting, 279 Mutual fund performance, 495 N National Car Company, 408 National Institutes of Health, 118 National Science Foundation, 118 Navy SEALs, 27 NCS Pearson, 80 Negotiated transfer prices, 509 Neiman Marcus, 548 Net book value, 499 Net operating profit after taxes (NOPAT), 504 Net present value (NPV), 454–459, 462, 463 assumptions in, 457, 458 defined, 454 internal rate of return vs., 459 sensitivity analysis with, 456–457 New York Yankees, 562 Nike, 49, 127, 468, 534 Nikon, 545 Nintendo, 84 Nissan Motor Company, 359, 373 No Child Left Behind Act, 80 Noncontrollable benefits, 42 Noncontrollable costs, 42, 209–211 Nonfinancial measures, 547, 551, 552 Non-value-adding activities, 420 NOPAT (net operating profit after taxes), 504 Normal costing, 587 Northwest Airline, 47 Not-for-profit organizations, 370 Novartis, 46 NPV, see Net present value O Office Depot, 78 Office Gallery, 80, 81, 128–129, 171 Olympus, 536 Oneonta, New York, 311 Open-book management, 14 Open briefings, 320 Operating budgets, 254, 255 Operating cash flows, 451–453 Operating leverage, 169–171 Operating risk, 166–171 Operations costing, 579 Opportunity costs, 6–7 for excess demand/capacity, 204 of money, 448–449 and transfer pricing, 512–515 Organization, Organization chart, 19–20 Outliers (data points), 116 Outsourcing, 171 Overapplied overhead, 591 Overhead, 52, 82–83 and absorption costing, 378 applied, 587 in cash budgets, 273–274 correcting, at year end, 592, 594 fixed, 83 fixed manufacturing, 585 manufacturing, 82–83, 263, 264, 586 manufacturing overhead cost budget, 263–264 overapplied and underapplied, 591–594 variable, 83 zeroing control accounts, 592 Overhead costs, 359, 378 See also Capacity costs Overhead rates, 89 See also Allocation rate defined, 359 predetermined, 587 of support activities, 645, 646 P Paramount Studio, 90 Partial contribution margin statements, 209 Participative budgeting, see Bottom-up budgeting Payback method (of capital budgeting), 460, 463 Payback period, 459–462 Pebble Beach, 204 “Peel the onion” approach, 219 PepsiCo, 578 Performance evaluation: with budgets, 256 for goal congruence, 10 relative, 494 variances in, 326 Performance measurements, 494–510, 546–547 See also Balanced scorecard; Critical success factors controllability of, 494 in cost centers, 495–496 economic value added, 503–506 informativeness principle of, 494 in investment centers, 498–506 long-term, 505–506 in profit centers, 496–498 residual income, 502–503 return on investment, 498–502 and transfer pricing, 506–509 Period costs, 76–77 Pharmaceutical industry: joint ventures in, 469 sunk costs in, 46 PIER cycle (of planning and control), 11–12, 256–257 Pioneer, 62 Planning decisions, 10–12 Plantwide rate (cost pools), 363 Polaroid, 563 Porsche, 416 Portfolio (of products), 171 Porto Alegre, 279 Portsmouth Naval Ship Yard, 466 Practical capacity, 409 Predetermined overhead rates: defined, 587 of support activities, 645, 646 Present value (of future cash flows), 448–449, 471–475 Prices and pricing: budgeting for changes in materials prices, 282–284 input price variance, 316–318 justifying, with cost allocations, 368–370 materials price variance, 317 purchase price variance, 328 sales price variance, 314 and sales volume, 164–166 transfer, see Transfer pricing Price-gouging, 215 Prime costs, 83 Principal Financial Group, 373 Process control charts, 324, 325 Process costing, 612–624 allocations in, 614–616 with beginning inventory, 619–620 job costing vs., 578–580 Find more at http://www.downloadslide.com Index 673 with many cost pools, 616–617 with standard costs, 620–621 weighted average, 619–620 Process-costing reports, 615–616 Process maps, 420 Process shops, 579 Procter and Gamble, 468, 493, 494, 579–580 Products: adding/dropping lines of, 224–225 joint, 222–223 launching, 558 life cycles of, 542–544 recalls of, 326 Product costs, 76–77, 410–412 Production budget, 258–260 Product-level activities, 405, 406 Product-level costs, 55, 56 Product mix, 172 assumptions about, 177 for scarce resource, 214–218 Product planning, 416 Profit(s): estimation of, using CVP relation, 157–158 incremental, 206–208 predicting, from sales forecasts, 122 target, 162–163 Profit after taxes, 163 Profit before taxes, 128, 129, 156, 157 equation for, 156 and margin of safety, 168, 169 as performance measurement, 497–498 with weighted contribution margin ratio, 175 with weighted unit contribution margin, 173–174 Profit centers, 277, 493, 496–498 Profit margin, 357, 402–403 Profit planning, 158–163 breakeven revenues, 161 breakeven volume, 158–160 target profit, 162–163 Promotions, 211–212 Purchase price variances, 328 p-values (of regression coefficients), 125 Q Qwest, 368 R Radio City Music Hall, 202, 203 R&D, see Research and development Real options, 219 Real options analysis, 468 Real-time feedback, 324 Rebates, 212 Recalls, product, 326 Reciprocal method (of cost allocation), 643–645 “Reciprocity in consumption,” 637 Recycling programs, 160 Red Cross, Regression analysis, 123–128 assumptions of, 125 coefficients in, 125 by credit rating agencies, 126 with Excel, 123–125 p-values for, 125 R-square in, 125 Relative performance evaluation, 494 Relative values, of decision options, 44 Relevant cost analysis, 210, 211, 214 Relevant costs and benefits, 42–45 Relevant range, 127–128 Replacement value, 499 Reported income, 365–368 Research, market, 558 Research and development (R&D): business strategy focused on, 536–538 expenses from, 267, 268 GAAP for, 504 Residual income (RI), 502–503, 505–506 Resources, scarce, 214–218 Resource planning, 419–420 Responsibility accounting, 277, 278 Responsibility centers, 277, 278, 492–494 Return on investment (ROI), 498–502, 505–506 advantages and disadvantages of, 500 depreciation and, 499 DuPont model of, 501, 502 Revenues, 156 incremental, 206–208 and sales volume, 50 Revenue budget, 258 RI, see Residual income Risk: of capital projects and payback method, 460 and cost of capital, 453 operating, 166–171 Robb, David, 320 Rockwell Collins, 368, 579 ROI, see Return on investment Rotary Foundation, 186 R-square (regression analysis), 125 S Safeway, 369 Saks Fifth Avenue, 534 Sales: institutional, 211 and internal markets, 259 Sales-leaseback arrangements, 451 Sales mix variances, 331–333 Sales price variance, 314 Sales quantity variance, 331–333 Sales volume: and cost classification, 53–54 and price, 164–166 relation to cost and profit, see CostVolume-Profit analysis and variability in costs/benefits, 50–52 Sales volume variance, 312–313 Salvage values, 451–452, 465–466 Sam’s Club, 534 Sapling Foundation, 118 Sarbanes-Oxley Act of 2002 (SOX), 16 Scarce resources, 214–218 Seagate, 540 Sears, 78, 164, 493, 536 Seasonal demand, 204 SEC, see U.S Securities and Exchange Commission Segmented contribution margin statements, 128–130 product-level, 128–129 region- and customer-level, 129 Segment (product) margin, 128–129 Self-consumption, 638 Selling and administration costs, 83 Sequential allocation method, 642 See also Step-down method Service firms: cost flows in, 77–78 inventory in, 80 Shareholder value, Sheep farming, 549 Short-term decisions, 200–225 about adding/dropping product lines, 224–225 about promotions, 211–212 about scarce resources, 214–218 about special orders, 205–211 calculations of value for, 206–208, 211 and gross approach (to cost analysis), 210–212 involving joint costs, 222–223 make-versus-buy, 212–214 qualitative and long-term implications of, 218–220 reasons for, 202–205 relevant cost analysis for, 209, 211 Siemens, 363, 374, 494 SKF Bearings, 579, 580 Slope (of regression line), 125 Snow removal, 311 Society of American Florists, 29 Soft measures, 551 Sony, 62, 81, 82, 494, 536 Southwest Airlines, 536 SOX (Sarbanes-Oxley Act of 2002), 16 Special orders, 205–211 calculations of value for, 206–208, 211 gross approach (to cost analysis), 210–211 relevant cost analysis for, 209, 211 Spending variance, 314, 315 Split-off point, 222, 223 Stage allocations, 407 Stage allocations, 410–412 Standard and Poor’s, 126 “Standards for Ethical Conduct of Members,” 22–24 Standard process costing, 620–621 Stanford University School of Medicine, 450 Staples (company), 78 The Staples Center, 202 Starbucks, 448 Statistical control charts, 338 Stavropoulos, William, 504 Step costs, 53–56 Step-down method (of cost allocation), 641–643 Stern Stewart & Company, 503 Strategic plans, 255, 449 Strategies (business), 534–556 and balanced scorecard, 551–555 cost leadership, 536–538, 541–542 for cost planning, 542–546 Find more at http://www.downloadslide.com 674 Index defined, 534 determinants of, 534–536 implementing, 546–551 and value chain, 539–541 value differentiation, 536–538, 540–542 Structure (organizational): and budgeting, 276–278 for decentralized organization, 490–491 Subsidies, 160 Sunk costs, 45–46 Supply, and demand, 202–205 Supply chain management, 81 Support activities, 636–646 Sustainability, of business strategy, 536 Suzuki, 82–83 T Target (company), 497, 548 Target costing, 544–546, 557–559 Target profit, 162–163 Tata Consultancy Services, 541 Taxes: and capital budgets, 463–466 in CVP analysis, 163 depreciation tax shield, 464 and not-for-profit organizations, 370 and salvage value, 464–466 and transfer pricing, 507, 509 Tax planning, 269 The TB Alliance, 127 Teardown analysis, 84 Teva Pharmaceutical Industries Ltd., 508 Theory of Constraints (TOC), 218 Throughput margin, 218 Time: allocations of, 214–217 and controllability of benefits/costs, 46–49 in NPV analysis, 455 “Time value of money,” 177, 448–449 Timkin, 83 T-Mobile, 548 TOC (Theory of Constraints), 218 Toll Brothers, 85 Tomra Corporation, 160 Top-down budgeting, 278, 279 Toro Corporation, 203 Toshiba, 62, 84 Totals approach (to cost analysis), 210 Total manufacturing costs charged to production, 85 Total profit variances, 308–310 Toyota Motors, 467, 536 Toys R Us, 224 Traceability: of benefits, 52–53 and cost allocations, 374 of costs, 52–53, 580 Transfer price, 506 Transfer pricing, 506–509 activity-based costing vs., 508 approaches to, 508, 509 conflict in, 507–508 cost-based, 508, 509 economically optimal, 512–515 international, 509 market-based, 509 negotiated, 509 reasons to use, 506–507 and taxes, 507, 509 Travelocity, 563 Treasurer, 19, 20 Trek, 53 True cost line, 119 Two-factor cost allocations, 649 See also Dual-rate cost allocations Tyson Foods, 562 U U-Haul, 98 Unallocated activity cost, 409–410 Underapplied overhead, 591 Unfavorable (U) variances, 308–309 Unit contribution margin, 156, 312 United Airlines, 47–48, 536, 547 United Parcel Service (UPS), 9, 404, 415, 433, 547 U.S Army Rangers, 27 U.S Professional Golf Association, 564–565 U.S Securities and Exchange Commission (SEC), 14, 16 United States Marine Corps, 10 United States Steel, 324 Unit-level activities, 404–406 Unit-level costs, 54–56 Unit variable cost, 120 University of Pennsylvania, 562 UPS, see United Parcel Service Usage budgets, 260–264 U variances, see Unfavorable variances V Value, 6–7 in absorption costing, 364, 365 of depreciable fixed assets, 499 future, 471–475 negative, 45 present, 448–449, 471–475 relative, 44 salvage, see Salvage values shareholder, for special orders, 206–208, 211 Value-adding activities, 420 Value chain, 539–542 and cost leadership strategies, 541–542 defined, 539 and value differentiation strategies, 540–542 Value differentiation strategies, 536–538, 540–542 Value engineering, 558 Value proposition, 534 Variability, of costs and benefits, 50–52 Variable costing, 365, 367–368 Variable cost of goods manufactured budget, 264–265 Variable cost of goods sold budget, 265–268 Variable costs: defined, 50 estimating, see Cost estimation Variable cost variances, 315–318 Variable overhead, 83 Variances, 308–333 analysis of, 320–322, 324 calculating, 308–318 control decisions from, 322–323 defined, 308 direct labor price, see Labor rate variances favorable, 308–309 fixed cost spending variance, 314, 315 flexible budget, 310–318 input efficiency, see Input quantity variances input price, 316–318 input quantity, 317–318 labor efficiency, 317, 318 labor quantity, see Labor efficiency variances labor rate, 317, 318 market size and market share, 329–330 materials efficiency, 317 materials price, 317 nonfinancial controls vs., 323–326 as performance measurement, 496 purchase price, 328 in sales for multiproduct firms, 331–333 sales mix, 331–333 sales price, 314 sales quantity, 331–333 sales volume, 312–313 spending, 314, 315 total profit, 308–310 unfavorable, 308–309 variable cost variances, 315–318 Verizon Wireless, 84, 548 Volkswagen AG, 326 Volume, crossover, 169 Vulcan Forge, 85–87, 90, 91 W WACC (weighted average cost of capital), 504 Wagoner, Rick, 357 Wall Street Journal, 495, 562 Wal-Mart, 81, 324, 417, 534, 536 Waste Electrical and Electronic Equipment (WEEE) Directive, 45 Web sites, 420 Weighted average cost of capital (WACC), 504 Weighted average process costing, 619–620 Weighted contribution margin ratio, 174–175 Weighted unit contribution margin, 172–174 Western Digital, 540 Westin, Inc., 67 Whale curve, 418 Wharton School, 562 Whole Foods, 539 WIP inventory account, see Work-in-process inventory account Wipro, 497, 541 Work-in-process (WIP) inventory account, 84, 85, 87 in job costing, 580 in process costing, 614–617, 620, 621 prorating overhead to, 594 Find more at http://www.downloadslide.com Equations in Select Chapters Chapter (CVP Analysis) Breakeven volume Fixed costs _ ​          ​ Breakeven volume (multiproduct) Fixed costs _ ​         ​ Breakeven revenue Fixed costs ​          ​ Breakeven revenue (multiproduct) Fixed costs ​           ​ Contribution margin Revenue total variable costs Contribution margin ratio Unit contribution margin/price Unit contribution margin Weighted unit contribution margin Contribution margin ratio Weighted contribution margin ratio Contribution margin/revenue Margin of safety (Revenue breakeven revenue)/Revenue (Sales in units breakeven volume)/Sales in units Operating leverage Fixed costs/Total costs Profit before taxes [(Price Unit variable cost) Sales volume in units] Fixed costs (Unit contribution margin Sales volume in units) Fixed costs Contribution margin Fixed costs Contribution margin ratio Revenue Fixed costs Profit after taxes Profit before taxes (12 Tax rate) Unit contribution margin Price variable cost per unit (Revenue variable costs)/units sold Weighted unit contribution margin (% of sales in units Unit contribution margin) Weighted contribution margin ratio (% of revenues Contribution ­margin ratio) Chapter (Variance Analysis) Actual input cost Actual input quantity Actual cost per unit of input Flexible budget cost Flexible budget quantity Budgeted cost per unit of input Flexible budget quantity Actual sales quantity Quantity of input budgeted for unit of sales Flexible budget variance Actual profit Flexible budget profit Input price variance (Budgeted price per unit of input Actual price per unit of input) Actual input quantity Input quantity variance (Flexible budget quantity of input Actual quantity of input) Budgeted price per unit of input (Continued) Find more at http://www.downloadslide.com Chapter (Variance Analysis) (continued) Market share variance Actual market size (Actual market share ­Budgeted market share) Budgeted unit contribution margin Market size variance (Actual market size Budgeted market size) ­Budgeted market share ­Budgeted unit ­contribution margin Sales mix variance Actual total sales (WUCMflexible budget WUCMmaster budget) Sales price variance (Actual sales price Budgeted sales price) Actual sales quantity Sales quantity variance (Actual total sales Budgeted total sales) WUCMmaster budget Sales volume variance Flexible budget profit Master budget profit (Actual sales quantity Budgeted sales quantity) Budgeted unit contribution margin Total profit variance Actual profit Master budget profit Chapter 11 (Capital Budgeting) Accounting rate of return Average annual income/average annual investment Depreciation tax shield Depreciation expense tax rate Future value of $1 (1 + r)n Future value of an annuity of $1 in arrears (1 + r) – ​      ​  Present value of $1 Present value of an annuity of $1 in arrears n r 1/(1 + r)n – (1 + r)–n ​  _     ​ r  Chapter 12 (Performance Evaluation) Asset turnover Sales/investment Economic value added (EVA) Net operating profit after taxes [Weighted ­average cost of capital (invested capital current ­liabilities)] Profit margin (operating expenses/sales) Residual income (RI) Profit (required return investment) Return on investment (ROI) Profit/Investment Minumum transfer price acceptable to selling ­division (TPMIN) Variable cost of transfer selling division’s ­opportunity cost of capacity Maximum transfer price the buying divisions is willing to pay (TPMIN) Buying division’s opportunity cost ... Sivaramakrishnan, Geoffrey B Sprinkle     p cm   Includes index   ISBN 978-0-471-46785-4 (cloth)   Managerial accounting I Sivaramakrishnan, K (Konduru) II Sprinkle, Geoffrey B   III Title   HF5657.4 .B3 4... order books or for customer service please call 1-800-CALL WILEY (225-5945) Library of Congress Cataloging-in-Publication Data Balakrishnan, Ramji   Managerial accounting/ Ramji Balakrishnan, K Sivaramakrishnan,... Murphy Sandra Rigby Kara Taylor Sheena Goldstein Allie K Morris Nancy Field David Levy Tyler Stableford/Getty Images This book was set in New Baskerville Regular by GGS Book Services PMG and printed