COST ACCOUNTING A MANAGERIAL EMPHASIS HORNGREN DATAR RAJAN BEAUBIEN GRAHAM Stanford University Harvard University Stanford University Dalhousie University University of Victoria S EVE N TH C A N A D I A N Toronto E D I TI ON Editor-in-Chief for Arts, Business and Economics: Claudine O’Donnell Acquisition Editor: Megan Farrell Senior Marketing Manager: Loula March Manager of Content Development: Suzanne Schaan Developmental Editor: Suzanne Simpson Millar Program Manager: Patricia Ciardullo Project Manager: Sarah Gallagher Production Editor: Vastavikta Sharma, Cenveo® Publisher Services Copy Editor: Laurel Sparrow Proofreader: Marg Bukta Full Service Vendor: Cenveo Publisher Services Permissions Project Manager: Joanne Tang Photo Researcher: Aptara Permissions Researcher: Aptara Cover Designer: Anthony Leung Interior Designer: Anthony Leung Cover Image: J A Kraulis/Masterfile Credits and acknowledgments for the material borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within the text Original edition published by Pearson Education, Inc., Upper Saddle River, New Jersey, USA Copyright © 2001 Pearson Education, Inc This edition is authorized for sale only in Canada If you purchased this book outside the United States or Canada, you should be aware that it has been imported without the approval of the publisher or the author Copyright © 2016, 2013, 2009, 2005 Pearson Canada Inc All rights reserved Manufactured in the United States of America This publication is protected by copyright and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Canada Inc., Permissions Department, 26 Prince Andrew Place, Don Mills, Ontario, M3C 2T8, or fax your request to 416-447-3126, or submit a request to Permissions Requests at www.pearsoncanada.ca 10 [CKV] Library and Archives Canada Cataloguing in Publication Horngren, Charles T., 1926-, author          Cost accounting : a managerial emphasis / Charles T Horngren, Srikant M Datar, Madhav V Rajan, Louis Beaubien, Chris Graham.—7th Canadian edition Includes index.Revision of: Cost accounting : a managerial emphasis / Charles           T Horngren [et al.].—6th Canadian ed —Don Mills,           Ont : Pearson Canada, 2012.ISBN 978-0-13-313844-3 (hbk.)           1. Cost accounting—Textbooks.  I. Title HF5686.C8H59 2015                  658.15’11                C2014-904869-6 ISBN 978-0-13-313844-3 To Our Families The Horngren Family (CH) Swati, Radhika, Gayatri, Sidharth (SD) Gayathri, Sanjana, Anupama (MVR) This effort is dedicated to Ian, Megan, Evan, Lucy, Alec and Molly (and Charlie, too) -Louis Beaubien To Professor Howard Teal (a previous Canadian author of Horngren et al.) who, along with Professor Rick Robertson, first got me excited about accounting And to my wife Joan and daughter Adrienne, who put up with/ supported me  during my “creative” process! -Chris Graham iii This page intentionally left blank Brief Contents Preface xiv Part One Cost Accounting Fundamentals 1 The Accountant’s Vital Role in Decision Making An Introduction to Cost Terms and Purposes 24 Cost–Volume–Profit Analysis 57 Job Costing 97 Activity-Based Costing and Management 134 Available online on MyAccountingLab: End-of-Part Case 1: Katherine’s Truffle Kreations—The Early Years Part Two Tools For Planning And Control 172 Master Budget and Responsibility Accounting 172 Flexible Budgets, Variances, and Management Control: I 226 Flexible Budgets, Variances, and Management Control: II 275 Income Effects of Denominator Level on Inventory Valuation 318 Available online on MyAccountingLab: End-of-Part Case 2: Katherine’s Chocolate Kreations—The Second Store Part Three Cost Information For Decisions 359 10 Analysis of Cost Behaviour 359 11 Decision Making and Relevant Information 409 12 Pricing Decisions: Profitability and Cost Management 453 13 Strategy, the Balanced Scorecard, and Profitability Analysis 489 Available online on MyAccountingLab: End-of-Part Case 3: Katherine’s Chocolate Kompany Goes Public Part Four Cost Allocation And Revenues 525 14 Period Cost Application 525 15 Cost Allocation: Joint Products and Byproducts 561 16 Revenue and Customer Profitability Analysis 596 17 Process Costing 639 18 Spoilage, Rework, and Scrap 681 Available online on MyAccountingLab: End-of-Part Case 4: Non-Manufacturing Costs (and Benefits) Part Five Control and Budgeting Strategies 712 19 Inventory Cost Management Strategies 712 20 Capital Budgeting: Methods of Investment Analysis 752 21 Transfer Pricing and Multinational Management Control Systems 794 22 Multinational Performance Measurement and Compensation 827 Available online on MyAccountingLab: End-of-Part Case 5: Consolidating Manufacturing; End-of-Part Case 6: Winnipeg Beckons; End-of-Part Case 7: Batteries for Everyone: Assessing Performance Appendix A Notes on Compound Interest and Interest Tables 871 Glossary 877 Name Index 892 Subject Index 896 v VI ● CONTENTS Table of Contents Preface xiv Part One Cost Accounting Fundamentals 1 The Accountant’s Vital Role in Decision Making iTunes Variable Pricing: Downloads Are Down, but Profits Are Up Accounting Systems: Financial and Management Accounting Strategic Decisions and Management Accounting Value-Chain And Supply-Chain Analysis and Key Success Factors Value-Chain Analysis Supply-Chain Analysis Key Success Factors (KSF) Concepts in Action: Management Accounting Beyond the Numbers Decision Making, Planning, and Control: The Five-Step Decision-Making Process Key Management Accounting Guidelines and Organization Structure Cost–Benefit Approach Behavourial and Technical Considerations Different Costs for Different Purposes 10 Corporate Structure and Governance: Accountability, Ethics, and Social Responsibility 10 Corporate Governance 11 Professional Ethics 12 Institutional Support 12 Corporate Social Responsibility (CSR) 13 Sustainability Accounting 14 Alternative Reporting 15 Pulling It All Together—Problem for Self-Study 16 | Summary Points 17 | Terms to Learn 17 | Assignment Material 18 | ShortAnswer Questions 18 | Exercises 18 | Problems 20 | Collaborative Learning Case 23 An Introduction to Cost Terms and Purposes 24 High Fixed Costs Bankrupt Twinkie Maker Costs and Cost Terminology 25 Commonly Used Classifications of Manufacturing Costs 25 Direct Costs and Indirect Costs 26 Factors Affecting Direct/Indirect Cost Classifications 27 Prime Costs and Conversion Costs 27 Cost-Behaviour Patterns: Variable Costs and Fixed Costs 28 vi Variable Costs 28 Fixed Costs 28 Cost Drivers 30 Concepts in Action: How AutoShare Reduces Business Transportation Costs Total Costs and Unit Costs 31 Unit Costs 31 Cost of Goods Sold and the Statement of Comprehensive Income 32 Inventory Valuation and the Statement of Financial Position 34 Types of Inventory 35 Inventoriable Costs 35 Period Costs 35 Illustrating the Flow of Inventoriable Costs: A Manufacturing-Sector Example 36 Inventoriable Costs and Period Costs for a Merchandising Company 38 Measuring and Classifying Costs Requires Judgment 38 Measuring Labour Costs 38 Decision Framework and Flexibility of Costing Methods 40 Concepts in Action: Don’t Overcharge the Government Pulling It All Together—Problem for Self-Study 42 | Summary Points 43 | Terms to Learn 44 | Assignment Material 44 | ShortAnswer Questions 44 | Exercises 45 | Problems 50 | Collaborative Learning Cases 55 Cost–Volume–Profit Analysis 57 How “The Biggest Rock Show Ever” Turned a Big Profit Essentials of CVP Analysis 58 CVP Analysis: An Example 58 Expressing CVP Relationships 60 Contribution Margin Percentage: Breakeven Point in Revenue 63 Using CVP to Calculate a Target Operating Income 63 Contribution Margin, Gross Margin, Operating Margin, and Net Income Margin 64 Target Net Income and Income Taxes 64 Using CVP Analysis to Make More Complex Decisions 65 CVP Analysis for Decision Making 65 Decision to Advertise 66 Decision to Reduce Selling Price 66 Margin of Safety and Risk 67 Alternative Fixed- and Variable-Cost Structures 68 Operating Leverage 69 Concepts in Action: Sky-High Fixed Costs Trouble XM Satellite Radio Decision Models and Uncertainty 70 Role of a Decision Model 71 Expected Value 71 CONTENTS ● VII Effects of Sales Mix on Income 72 Multiple Cost Drivers 74 CVP Analysis in Non-Profit and Public Sector Organizations 74 Pulling It All Together—Problem for Self-Study 75 | Summary Points 78 | Terms to Learn 79 | Assignment Material 79 | ShortAnswer Questions 79 | Exercises 79 | Problems 86 | Collaborative Learning Cases 96 Job Costing 97 What Does It Cost to Do the Job? Building Blocks of Costing Systems 98 Job-Costing and Process-Costing Systems 98 Job Costing: Evaluation and Implementation 99 Actual, Budgeted, and Normal Costing 100 Normal Costing 100 Additional Points to Consider When Calculating JobCost Allocation Rates 104 Concepts in Action: Job Costing on the NextGeneration Military Fighter Plane Actual Costing 105 A Normal Job-Costing System and Cost Flow 106 General Ledger 107 Explanations of Transactions 108 Subsidiary Ledgers 109 Budgeted Indirect Costs and End-of-Accounting-Year Adjustments 112 Adjusted Allocation-Rate Approach 112 Proration Approach 113 Write-off to Cost of Goods Sold Approach 114 Choice Among Approaches 114 Pulling it all Together—Problem for Self-Study 115 | Summary Points 117 | Terms to Learn 118 | Assignment Material 118 | Short-Answer Questions 118 | Exercises 118 | Problems 126 | Collaborative Learning Cases 131 Activity-Based Costing and Management 134 Accurate Assignment = Better Profit Product Costing: Overcosting and Undercosting 135 Undercosting and Overcosting 135 Product-Cost Cross-Subsidization 136 Simple Costing System at Plastim Corporation 136 Design, Manufacturing, and Distribution Processes 136 Overview of Plastim’s Simple Costing System 137 Applying the Five-Step Decision-Making Process at Plastim 139 Guidelines for Refining a Costing System 140 Activity-Based Costing Systems 140 Plastim’s ABC System 140 Cost Hierarchies 142 Implementing Activity-Based Costing 144 Comparing Alternative Costing Systems 146 Considerations in Implementing Activity-Based-Costing Systems 147 Concepts in Action: Hospitals Use Time-Driven Activity-Based Costing to Reduce Costs and Improve Care ABC: The Foundation of ABM 149 Pricing and Product-Mix Decisions 149 Cost Reduction and Process Improvement Decisions 149 Design Decisions 150 Concepts in Action: If Only Everything Did Not Depend on Everything Else ABC in Service and Merchandising Companies 151 Pulling It All Together—Problem for Self-Study 152 | Summary Points 154 | Terms to Learn 155 | Assignment Material 155 | Short-Answer Questions 155 | Exercises 156 | Problems 164 | Collaborative Learning Cases 171 Part Two Tools For Planning And Control 172 Master Budget and Responsibility Accounting 172 Budgets Communicate Choices The Decision Framework and Budgets 173 Advantages of Budgets 174 Approaches to Budgeting 175 Operating and Strategic Performance Assessment 176 Coordination and Communication 176 The Master Operating Budget 177 Time Coverage 177 Steps in Developing An Operating Budget 177 Basic Data and Requirements 179 Preparing a Master Operating Budget 181 Preparing the Cash Budget 187 Concepts in Action: Web-Enabled Budgeting and Hendrick Motorsports Preparation of the Cash Budget 190 Responsibility Versus Controllability 194 Organizational Structure and Responsibility 194 Feedback 196 Definition of Controllability 196 Emphasis on Information and Behaviour 197 Human Aspects of Budgeting 197 Concepts in Action: Management Accounting and the Corporate Governance Laws Budgeting: A Process In Transition 198 Pulling It All Together—Problem for Self-Study 199 APPENDIX: Three Budget Strategies: Sensitivity Analysis, Kaizen Budgeting, and Activity-Based Budgets 204 Summary Points 207 | Terms to Learn 207 | Assignment Material 208 | Short-Answer Questions 208 | Exercises 208 | Problems 213 | Collaborative Learning Cases 223 VIII ● CONTENTS Flexible Budgets, Variances, and Management Control: I 226 Keeping It Real The DM Framework and Variance Analyses 227 Static and Flexible Budgets 227 The Costing System At Webb Company 228 Static-Budget Variances 229 Developing a Flexible Budget From the Cost MIS 231 Flexible-Budget Variances and Sales-Volume Variances 232 Direct Variable Rate and Efficiency Variances 235 An Illustration of Rate and Efficiency Variances for Inputs 236 Rate Variances 237 Efficiency Variances 238 Presentation of Rate and Efficiency Variances for Inputs 239 Flexible Budgeting and Activity-Based Costing 241 Relating Batch Costs to Product Output 242 Rate and Efficiency Variances 243 Focus On Hierarchy 243 Managerial Uses of Variance Analyses 244 Performance Evaluation 244 Financial and Nonfinancial Performance Measures 244 When to Investigate Variances 245 Continuous Improvement 245 Concepts in Action: Starbucks Reduces Direct-Cost Variances to Brew a Turnaround Impact of Inventories 247 Pulling It All Together—Problem for Self-Study 247 APPENDIX 7A: Budgets, Benchmarks, and Standards 249 APPENDIX 7B: Mix and Yield Level Variances for Substitutable Inputs 254 Summary Points 258 | Terms to Learn 259 | Assignment Material 259 | Short-Answer Questions 259 | Exercises 260 | Problems 265 | Collaborative Learning Cases 273 Flexible Budgets, Variances, and Management Control: II 275 Tracking Performance Flexible-Budget MOH Cost Variances 276 The 5DM Framework and Overhead Costs 277 Assigning Fixed Manufacturing Overhead at Webb 278 Fixed Overhead Cost Variance Calculation and Analysis 278 Production-Volume Variance Calculation and Analysis 279 Journal Entries for Fixed Overhead Costs and Variances 282 Concepts in Action: Cost Allocation Base Denominator Decision: There Is a Right Way Flexible-Budget Variable Overhead Variances 284 Variable Overhead Cost Variance Calculations and Analyses 285 Level Variable Manufacturing Overhead Variance Analysis 286 Level Variable Manufacturing Overhead Rate and Efficiency Variances 287 Journal Entries for Variable Overhead Costs and Variances 290 Activity-Based Costing and Variance Analysis 291 ABC Variance Analyses 291 ABC Variance Analysis for Fixed Manufacturing Overhead Cost 293 Summary of All Overhead Cost Variances 294 Concepts in Action: Interdependencies and Shared Benefits Non-manufacturing Variance Analysis 297 Nonfinancial Performance Measures 297 Pulling It All Together—Problem for Self-Study 300 | Summary Points 302 | Terms to Learn 303 | Assignment Material 303 | Short-Answer Questions 303 | Exercises 303 | Problems 308 | Collaborative Learning Cases 316 Income Effects of Denominator Level on Inventory Valuation 318 Capacity-Level Choices Denominator Levels: A Complex Decision with Complex Effects 319 The Decision Framework and Denominator Choice 321 Effects on Reporting, Costing, Pricing, and Evaluation 323 Product Costing 325 Product Pricing: the Downward Demand Spiral 326 Concepts in Action: Denominator-Level Choice Reflects Recoverable Costs in Strategic Pricing Performance Evaluation 328 Capacity Decisions and Denominator-Level Issues 328 Inventory Valuation and Operating Income 329 Absorption and Variable Inventory Valuation Assumptions 329 Comparison of Standard Variable Costing and Absorption Costing 331 Concepts in Action: Capacity at Nissan Comparative Statements of Comprehensive Income 334 Explaining Differences in Operating Income 336 Effect of Sales and Production on Operating Income 337 Performance Evaluation: Undesirable Buildup of Inventories 338 Pulling It All Together—Problem for Self-Study 340 | Summary Points 341 APPENDIX 9A: Throughput: Super-Variable Costing 342 CONTENTS ● IX APPENDIX 9B: Breakeven Under Two Costing Policies 344 Terms to Learn 346 | Assignment Material 346 | Short-Answer Questions 346 | Exercises 347 | Problems 350 | Collaborative Learning Cases 357 Part Three Cost Information For Decisions 359 10 Analysis of Cost Behaviour 359 Cisco Understands Its Costs While Helping the Environment Basic Assumptions and Examples of Cost Functions 360 Basic Assumptions 360 Linear Cost Functions 360 Cost Classification: Choice of Cost Object 361 The Cause-and-Effect Criterion 362 Cost Drivers and the Decision-Making Process 363 Cost Estimation Methods 363 Industrial Engineering Method 363 Conference Method 364 Account Analysis Method 364 Quantitative Analysis Method 365 Steps in Estimating a Cost Function Using Quantitative Analysis 365 The High–Low Method Compared to Regression Analysis 367 Nonlinear Cost Functions 369 Time as a Cost Driver and as a Competitive Tool 370 Customer-Response Time and On-Time Performance 370 Time as a Cost and Performance Driver 371 Relevant Costs of Time 372 Relevant Revenues of Time 373 Quality as an Element of Cost 374 Analyzing Quality 375 Concepts in Action: What Does It Cost to Send a Text Message? Data Collection and Adjustment Issues 379 Output Level Changes: Short- and Long-Term Decisions 413 Outsourcing—Make or Buy—and Idle Facilities 415 Potential Problems in Relevant-Cost Analysis 417 Concepts in Action: The LEGO Group Opportunity Costs and Outsourcing 418 The “Total-Alternatives” Approach 419 The Opportunity-Cost Approach 420 The Carrying Costs of Inventory 421 Product Mix Decisions 422 The Theory of Constraints 423 Irrelevance of Past Costs and Equipment Replacement Decisions 425 Decisions and Performance Evaluation 426 APPENDIX 11A: Linear Programming 428 APPENDIX 11B: Using Excel Solver 430 Pulling it all Together—Problem for Self-Study 433 | Summary Points 435 | Terms to Learn 436 | Assignment Material 436 | Short-Answer Questions 436 | Exercises 436 | Problems 442 | Collaborative Learning Case 451 12 Pricing Decisions: Profitability and Cost Management 453 Fair and Square: Not What J C Penney Customers Wanted Relevant Costs, JetBlue, and Twitter Major Influences on Pricing 454 Costing and Pricing for the Short Run 455 Relevant Costs for Short-Run Pricing Decisions 455 Strategic and Other Factors in Short-Run Pricing 455 Effect of Time Horizon on Short-Run Pricing Decisions 456 Costing and Pricing for the Long Run 456 Calculating Product Costs for Long-Run Pricing Decisions 456 Target Costing for Target Pricing 459 Understanding Customers’ Perceived Value 459 Doing Competitor Analysis 459 Implementing Target Pricing and Target Costing 459 Value-Analysis and Cross-Functional Teams 460 Cost-Plus Pricing 462 Concepts in Action: Operating Income Analysis Reveals Strategic Challenges at Best Buy Alternative Cost-Plus Methods 464 Cost-Plus Pricing Contrasted Against Target Pricing 465 Fixed and Variable Cost Coverage 466 Life-Cycle Pricing and Relevant Qualitative Factors in Pricing 466 Developing Life-Cycle Reports 467 Conducting Fair Business and Pricing Decisions 468 Environmental Sustainability 470 Relevant Information and Decision-Making 410 The Concept of Relevance 410 Relevant Costs and Relevant Revenues 410 Quantitative and Qualitative Information 412 Pulling it all Together—Problem for Self-Study 472 | Summary Points 474 | Terms to Learn 475 | Assignment Material 475 | Short-Answer Questions 475 | Exercises 476 | Problems 482 | Collaborative Learning Case 487 Pulling it all Together—Problem for Self-Study 380 APPENDIX 10A: Regression Analysis 383 APPENDIX 10B: Learning Curves 391 Summary Points 394 | Terms to Learn 396 | Assignment Material 396 | Short-Answer Questions 396 | Exercises 397 | Problems 402 | Collaborative Learning Cases 405 11 Decision Making and Relevant Information 409 www.downloadslide.net 900 ● SUBJECT INDEX cost allocation (continued ) single-rate method, 530–531 stand-alone method, 546 step-down method, 537, 539–540, 541e cost analysis, 377–380, 460 accounting-period dimension, 753, 753e problems for, 380 project dimension of, 753, 753e cost application, 525 cost assignment, 25, 26, 98 activity-based costing (ABC) and, 141 cost centre, 195 cost classification, 361–362 direct vs indirect, 26–27 limits to flexibility in, 41–42 relevant range for, 362 systems, 42 time horizon in, 361–362 cost control, 149 cost driver, 30–31, 142, 362, 457 activity-based costing (ABC) and, 140 collect data on, 366 direct machine hours (DMH) as, 229 evaluating, 366 identifying, 363, 365 in process-costing method, 640 level of, 362 quality as, 375 reducing quantity of, 363 regression output to choose cost functions of, 387–388 relationship to costs, 366 time as, 370–371 cost estimation methods, 363–365 account analysis method, 364–365 conference method, 364 industrial engineering (or work measurement) method, 363–364 quantitative analysis method, 365 cost flow, 106–107 cost functions, 360 assumptions about, 360 cause-and-effect relationship and, 362–363 database for quantitatively estimating, 380–381 estimating and evaluating cost driver, 366 estimating using quantitative analysis, 365–366 forms of, 369e linear, 360–361 nonlinear, 369, 391 regression output to choose cost drivers of, 387–388 role of, 360–361 step fixed-cost, 370 step, 370 types of, 360–361 cost hierarchy, 142, 241, 603 control and, 243–244 customer mix analysis, 618–619 in activity-based costing (ABC) systems, 528 multiple regression and, 389–390 cost incurrence, 460 as key term in value analysis, 460 cost leadership strategy, 3, 3n, 490, 491, 492 balanced scorecard (BSC) and, 500 decision framework and choice of, 492 transforming a fixed to a variable cost (VC) in, 31 cost management, cost management policy, 297 cost minimization problems, 430 cost object, 25, 25e, 98, 105 choice of, 361–362 cost pool is direct or indirect depending on, 27 customer as, 603–604 direct costs of, 26 include variable and shortrun fixed costs, 98 indirect costs of, 26 cost of capital, 756 cost of goods available for sale (COGAS), 33, 38 how much to order decision, 714–716 when to order decision, 716–717 cost of goods manufactured (COGM), 32–33, 32e, 36, 106, 649, 798 normal spoilage and, 682–683 rework costs and, 696 cost of goods sold (COGS), 32–33, 32e, 34, 36, 38, 106, 107, 184, 193, 283, 284, 318, 330, 465, 643, 713 absorption costing and, 329 budget, 186 cost of sales (COS), 35 cost pools, 25, 98, 100, 135, 151, 228, 457 activity, 140, 142 allocation, 147 conversion, 640, 641, 642 detailed, 148 direct materials (DM), 640 fixed, 278 fixed-cost, 326 fixed manufacturing overhead (FMOH) costs, 278 homogenous, 146 indirect, 140, 141 overhead, 456 cost reductions, 149 cost tracing, 98 cost variance analysis, 233e cost-allocation base, 98, 142, 149, 366 as guideline for refining a costing system, 140, 141 cost-allocation decisions, 528–529, 528e ability to bear criteria, 528, 528e benefits received criteria, 528, 528e cause and effect criteria, 528, 528e fairness or equity criteria, 528, 528e cost-application methods, 525 cost-based approach, 457, 459 cost-based transfer prices, 800, 805–806 full-cost, 805 negotiated costs, 805–806 prorating between minimum and maximum prices, 806–807 variable costs, 806 cost-behaviour patterns, 28–29, 359 cost functions and, 360 linear cost patterns, 360 relevant range and, 362 variable costs (VC) and fixed costs, 28–29 cost–benefit analysis, 411, 412 health and safety not part of, 412 cost–benefit approach, 9, downside risk in, upside potential in, cost-incurrence curve, 461, 461e cost-plus method (CPM), 811 cost-plus pricing strategy, 454, 462–463 alternative, 464–465 compared to target pricing, 465–466 cost driver identification role in, 465 cost information role in, 465 return on investment (ROI), 464 cost-volume-profit (CVP) analysis, 57, 58 complex decision making using, 65–66 contribution method to understand relationships, 61 decision framework for, 59 distinguishes contribution margin, 64 equation method to understand relationships, 61 examples of, 58–60 expressing the relationships, 60–62 for non-profit company, 74–75 graph method to understand relationships, 61, 62 relevant information to complete, 58 to calculate target operating income, 63–64 understanding relationships in, 60–61 with multiple cost drivers, 74 cost-volume-profit graph, 62e costing systems, absorption, 343–344, 343e activity-based costing (ABC), 31, 135, 140–141 actual costing system, 100 alternative inventory, 344e backflush, 725–726, 727 before refining, 527–528 benefits of refining, 151, 527 comparing alternative, 146–147 comparisons of, 343–344, 344e cost-allocation bases guideline for refining, 140, 141 cradle-to-grave, 466 criticisms of, 342 customer life-cycle, 466 www.downloadslide.net SUBJECT INDEX ● 901 costing systems (continued ) denominator level choice and, 328 direct-cost tracing guideline for refining, 140, 141 flexible budgets in, 228 indirect-cost pools guideline for refining, 140, 141 job-costing, 98, 99–100 lean accounting, 735–737 life-cycle, 466–467, 470–471 long-run, 454 normal costing system, 100 process-costing, 98 refining, 146 sequential tracking in traditional, 727 short-run, 455 simple, 135–138, 138e standard, 251–252, 727 static budgets in, 228 synchronous tracking in standard, 727 throughput, 342, 343–344, 343e time-driven activity-based costing (TDABC), 148 traditional, 727 using simple, 135 variable, 343–344, 343e variance analysis interpretation and, 289 womb-to-tomb, 466 costs, 25 actual, 25 actual overhead, 108 allowable, 548 analysis of, 2, 460 appraisal, 374 assigning of, 100–101 batch-level, 143, 241–242, 242, 291 budgeted, 25, 174 business function, 414 capacity, 277 carrying category, 713 classification of, 40, 41 common, 546–547 controllable, 196 conversion, 26–27 current, 840–841 designed-in, 461 difference between engineered and discretionary, 508–509 differential, 417 direct, 26, 241 direct manufacturing labour, 111 discretionary, 508–509 downstream, 26 engineered, 508–509 expected future, 410 external failure, 374 facility-sustaining, 143 factors affecting direct/indirect classifications, 27 fixed, 413, 508 fixed manufacturing overhead (FMOH), 276–278 full product, 415 hierarchy, 241–242, 243–244 incremental, 409, 417, 808 incurrence, 460 indirect, 26 indirect manufacturing labour, 111 influence on pricing strategies, 454 internal failure, 374 inventoriable, 34, 179, 276, 329 irrelevant, 456 job, 99–100 joint, 562 labour, 38–40, 246 life-cycle budgeted, 466 locked-in, 460, 461 managing, 24 manufacturing, 25–26, 414 manufacturing overhead (MOH), 108, 276 marketing, 414 material, 246 materiality or significance of, 27 measuring, 38–39 mixed, 29, 361 non-manufacturing, 26, 111–112 non-value-added, 297, 462 of quality, 374–375, 375e opportunity, 713, 808 ordering category, 713 outlay, 808 output unit-level, 143, 241 overallocated indirect, 112 overhead, 100 period, 35, 179, 527 prevention, 374 previous department, 662 prime, 27–28 product-sustaining, 143 purchasing category, 713 relevant, 410, 411, 413, 455, 456 rework, 461 semivariable, 361 separable, 563 service-sustaining, 143 shrinkage category, 714 standard, 228 stockout category, 713–714 sunk, 412 terminology, 25 time, 371–372 total, 31–32 transaction, transferred-in, 661–667 underallocated indirect, 112 unit, 31–32 upstream, 26 value-added, 297, 462 variable cost (VC), 28, 143 variable manufacturing, 329 variable manufacturing overhead (MVOH), 276–278 costs of quality (COQ), 374 appraisal costs category, 374, 375e, 714 external failure costs category, 374, 375e, 714 internal failure costs category, 374, 375e, 714 nonfinancial measures of, 375–377 observation range and, 377e preparing reports on, 375, 376e prevention costs category, 374, 375e, 714 costs per available seat mile (CASM), 299 costs prediction, 769 cradle-to-grave costing strategy, 466 cradle-to-grave pricing strategy, 454 cross-sectional data, 366 cross-selling, 226 cumulative average-time learning model, 391 cumulative eligible capital amount (CECA), 761n current cost, 840–841 drawback of, 841 return on investment (ROI) performance measure, 840–841 customer activity-based costing (ABC), as revenue-allocation method, 603 categorization of shared costs in, 603–604 cost hierarchy concept in, 603 customer batch-level costs category in, 603 customer output unit-level costs category in, 603 customer-sustaining costs category, 603–604 distribution-channel costs category, 604 facility/corporate-sustaining costs category, 604 customer cost management, 297 customer growth potential, 618 customer life-cycle costing, 466 customer mix analysis, 618–619 activity-based costing (ABC) systems and, 618 branch adding or dropping, 620–622 cost hierarchy in, 618–619 customer adding, 620 customer dropping, 619–620 customer perspective, 495 customer preference map, 492 customer profitability analysis, 604, 604e, 616–617, 616e, 617e assessing customer value, 617–618 factors in allocating resources across customers, 618 customer relationship management (CRM), customer requirements, 459 customer retention likelihood, 618 customer satisfaction, 298 dimensions of, 298 in service-sector companies, 298 nonfinancial measure of value, 298, 299 customer service, customer’s perceived value, 459 importance of understanding, 459 customer-response time, 370 components of, 371e managing, 371 customers, influence on pricing strategies, 454 D death of a thousand cuts budgeting approach, 175 death spiral, 327 decentralization, 796 cost responsibility centres in, 797–798 costs of, 797 decision-making by subunits benefit of, 796 www.downloadslide.net 902 ● SUBJECT INDEX decentralization (continued ) focuses subunit benefit of, 796–797 in multinational companies (MNCs), 797 investment responsibility centres in, 797–798 management development benefit of, 796 motivation of subunits benefit of, 796 profit responsibility centres in, 797–798 responsiveness to subunit benefit of, 796 revenue responsibility centres in, 797–798 see also multi-stage production process transfer pricing in multistage production, 798–799, 800 decision framework for appropriate strategy, cost or value leadership strategy step, 493 future predictions step, 493 implementation and evaluation step, 493 information gathering and analysis, 492 problem identification step, 492 tracking cash flows and revising step, 754 decision framework for budgets, 173–174 decide and implement step in, 174 future prediction step in, 173 implementing and evaluating step, 174 problem identification step in, 173 decision framework for capital budgeting, alternative choices step in, 754 forecasting predictions step in, 754 obtaining funding and make investments step in, 754, 769 obtaining information step in, 753, 769 project identification step in, 753 decision framework for capital budgeting review, alternative choices step in, 773 funding and investing step in, 773 identification step in, 773 obtaining information step in, 773 prediction step in, 773 revision step in, 774 decision framework for joint cost allocation, evaluation step, 572–573 future outcome forecasting step, 565 implementation of available alternatives step, 572 information gathering step, 565 problem identification step, 564–565 sell or process further decision, 573–574 decision framework for process costing, 640–641 alternative choices decision step in, 642 evaluation step in, 642 future options forecasting step in, 641–642 information gathering step in, 640–641 problem identification step in, 640 decision models, 68, 70, 410, 411 calculating expected value, 71–72, 72e five decision making (5DM) model for capital budgeting, 753–755 five decision making (5DM) model for capital budgeting review, 773–774 linear programming (LP) as, 428 long-run strategic, 98 performance evaluation and, 427 relevant information in, 410 role of, 71 uncertainty and, 71 decision-making process, action choices, 410 alternative choices step in, 363 cost drivers and, 363–364 cost functions role in, 360–361 differential costs in, 417 evaluation step in, 363 explanation for differences between expected and actual outcomes, 410 five decision-making (5DM) model for capital budgeting, 753–755, 769 for job costing systems, 99–100 forecasting outcomes in, 410 future predictions step in, 363 health and safety in, 412 incremental costs in, 417 information step in, 363 irrelevant costs can mislead in, 417 post-implementation process, 410 problem identification step in, 363 relevant data (information), 410 short- and long-term production output in, 413 understanding relevance of costs, 412 unit-cost data can mislead in, 417–418 defining activities, 141 degree of operating leverage, 69 delivery time, 371 demand measures, 322 master-budget capacity, 322 normal capacity and, 322 denominator level, 319, 330 budgeting and, 328 costing systems and choices of, 328 required by Canada Revenue Agency (CRA), 320 denominator-level decisions, 319 affects of, 323–324 ASPE/IFRS standards and, 326 Canada Revenue Agency (CRA) and, 326 decision framework for, 321–322, 323–324 future predictions step in, 323 implementation step in, 323–324 information step in, 321 long-run strategic decisions, 328 master-budget capacity and, 319 normal capacity and, 319 performance evaluation step in, 328 practical capacity and, 319 problem identification step in, 321 product costing and, 325–326 supply or demand measure of capacity, 319, 320e, 321–322 theoretical capacity and, 319 denominator-level variance, 280 dependent variable, 365 collect data on, 366 depreciation, 111, 190, 193 design of products, services, or processes, designed-in costs, 461 diagnostic control systems, 850 different costs for different purposes, 10 differential cost, 417 differential revenue, 417 differentiation strategy, 3n digital subscriber lines (DSLs), 492 direct allocation method, 537, 539, 540e advantages and disadvantages of, 544 direct costing, 331 direct costs, 26, 246 common categories of, 241 direct engineered costs, 509 direct labour (DL) cost, 26 direct machine hours (DMH), 229, 278, 287, 289, 297 direct manufacturing costs, 456, 457e direct manufacturing hours (DMH), 279 direct manufacturing labour, 110–111 direct manufacturing labour (DML) cost, 25, 26, 28 direct manufacturing labour budget, 183–184 direct manufacturing labour cost category, 100, 101–102, 111 as example of output unit-level costs, 241 direct manufacturing labour variance, 239 direct manufacturing labourhours (DMLH), 104, 138, 142, 143, 177, 228, 237, 321, 456 direct marketing labour-hours (DLH), 228, 237 www.downloadslide.net SUBJECT INDEX ● 903 direct materials (DM) cost, 25, 26, 28, 456 direct materials (DM) cost category, 100–101, 110 as example of output unit-level costs, 241 direct materials (DM) efficiency variance, 254 direct materials (DM) ending inventory, 228 direct materials (DM) framework, 227 decide upon and implement step in, 227 evaluation step in, 227 future predictions step in, 227 identify problem step in, 227 obtain information step in, 227 direct materials inventory, 35, 36 direct materials (DM) mix, direct materials yield variances, 256 direct materials mix variance, 256 interpretation of, 256 direct materials purchases budget, 183 direct materials usage budget, 183 direct materials (DM) rate, efficiency variance and, 255–256 substitutable inputs and, 255–256 direct materials yield variance, 256 direct materials (DM) mix and, 256 interpretation of level 4, 257 direct method, 537, 539, 540e advantages and disadvantages of, 544 direct write-of approach, 252 direct-cost tracing, 140, 141 discount rate, 756 discounted cash flow (DCF), 755–756 annuity factor in, 757–758 focus on cash inflows and outflows, 755 global expansion and, 772 income taxes and, 761 internal rate-of-return (IRR) method, 756 net present value (NPV) method, 756 relevant cash flows and, 764–765 sensitivity analysis for, 760 time horizon and, 756 time value of money as key feature of, 756 discounted cash flow analysis, 756, 770 discretionary costs, 508, 509 features of, 509 identifying unused capacity for, 509 research and development (R&D) as, 510 distress prices, 804–805 distribution, disturbance term, 386 Dodd-Frank Wall Street Reform and Consumer Protection Act, 829 downside risk, 9, 68 downsizing, 509 downstream costs, 26 downward demand spiral, 326 drilling down, 244 dual pricing, 807–808 dual-rate cost-allocation method, 530 dual-rate method, 530, 531–532 benefits of, 533–534 budgeted rates in, 534 compared to single-rate method, 533–534 resource consumption accounting (RCA) and, 534, 534n dumping, 470 DuPont method, 834–835, 834n, 835e, 837–838 Durbin-Watson statistic, 387 E e-commerce, 463 earnings before interest and taxes (EBIT), 835 economic order quantity (EOQ) procurement model, 714 accurate estimates of cost parameters used in, 721 analysis ignores purchasing, stockout and quality costs, 714 goal-congruence issues in, 722 just-in-time (JIT) purchasing and, 722–725 prediction errors in, 722 using, 714–716 economic sectors (in which businesses operate), manufacturing sector, 34, 35 merchandising sector, 34 service sector, 34 economic substance, economic value added (EVA) performance measure, 832, 836–837, 839 economies of scope, 492 effectiveness, 244 customer agility and, 298 efficiency variance, 234 controlling, 236 defined, 238–239 direct materials (DM) rate and, 255–256 direct variable rate and, 235 input illustration, 236–237 input presentation, 239–241 interpretation of level analyses, 238–239 interpretation of variable setup overhead, 293–294 reasons for unfavourable, 293 reasons for, 289 unfavourable (U) variance and, 243 variable manufacturing overhead (MVOH) costs, 287–288 variable overhead, 287–288 variable-cost sources of, 235e, 236e efficiency, 244 customer agility and, 298 manufacturing cycle, 371 effort, 796 employee labour records, 110–111 end-of-accounting-year adjustments, 112 end-of-period adjustments, 252 ending balance (EB), 190 ending inventory budget, 185 ending WIP inventory (EI WIP), 643, 646–647 spoilage approaches in process-costing system, 685 engine control units (ECUs), 332 engineered costs, 508, 509 cause-and-effect relationship result, 509 identifying unused capacity for, 509 enterprise resource planning (ERP) system, 2, 726 customization of, 726 inventory cost control by, 726 just-in-time (JIT) purchasing and, 726 materials requirements planning (MRP) and, 726 supply chain strategy for, 726 enterprise risk management (ERM), 498 balanced scorecard (BSC) and, 498 identifies risk, 498 triple bottom line responsibility and, 498 environmental sustainability, 470–471 corporations and, 498 performance measures, 851–852 equation method (to understand model CVP relationships), 61 equivalent unit (EU), 641, 643 equivalent units in beginning WIP inventory (BI WIP), 643 equivalent units in ending WIP inventory (EI WIP), 643 spoilage approaches in process-costing system, 685 error term, 386 estimated net realizable value (NRV) method, 564, 568–569, 570–571, 572 as predominant choice, 572 estimated statements, 173 ethical standards, 12–13, 41, 198, 850–851 challengers to, 12–13 exceptions-based approach to management, 227 exchange rates, influence on pricing strategies, 454 expected future costs, 410 expected future revenues, 410 expected value, 71–72 experience curve, 391 external failure costs, 374 F facility-sustaining costs, 143 fair and square pricing strategy, 453 fairness of pricing, 548 www.downloadslide.net 904 ● SUBJECT INDEX favourable (F) variance, 227 interpretation of in performance evaluation, 244 variable manufacturing overhead (VMOH) costs, 289 financial accounting, compared to management accounting, 2–3, 3e fitness in, 228 joint cost allocation for decision-making, 564 joint cost allocation in, 564 opportunity costs in, 420 financial budgets, 173, 179 purpose of, 173 financial data, 410 analyzing, 410–411, 411e relevance of, 410–411 financial performance measures, 198, 297 overhead variances as examples of, 297 financial performance measures of organization subunits, benchmarks for, 847 comparing performance measures, 838–839 current cost accrual accounting measure for, 840–841 defining investment for, 840 distinguish division from a manager, 845–847 economic value added (EVA) measure, 832, 836–837, 839 feedback timing, 843 for multinational companies (MNCs), 844–846 gross or net book value, 841–843 historical-cost investment measures, 840, 841 residual income (RI) measure, 832, 835–836, 839 return on investment (ROI) measure, 832, 833–835 return on sales (ROS) measure, 832, 837–838, 839 setting performance goals, 843 time horizon for, 838–839 financial perspective, 495 financial services companies, 151 financial statement of comprehensive income, 60e financial-accounting reporting method, 321 fineness, 228 finished goods (FG) inventory, 35, 36, 111, 318, 640 first incremental product, 600 first-in, first-out (FIFO) process-costing method, 179, 642, 643, 653–657 spoilage in, 685–686, 687–688 transferred-in costs and, 665–667 fishbone diagrams, 378 fitness (in budgets), 228 five-step decision-making process, 6–7, 20 applying, 139–140 benchmarking step, classifying costs using, 41 decision-making step, future predictions step, problem identification step, scorekeeping step, 7–8 fixed cost (FC), 28, 57, 58, 361 advertising as, 66 alternative structures, 68 calculating per unit, 465 companies with high, 57 cost allocation based on budgeted rates and actual usage, 535–536 cost allocation based on budgeted rates and usage, 535 example of a company with high, 70 irrelevant, 413 manufacturing, 58 no automatic decrease as volume declines, 70 non-manufacturing, 58 significant impact on profitability, 277 unitized, 104–105, 465 fixed cost coverage, 466 fixed cost variance, 230 fixed manufacturing overhead (FMOH) costs rate, 318, 326 fixed manufacturing overhead (FMOH) costs variance, 277–278 activity-based costing (ABC) system analysis of, 293–294 analysis of, 279–280 calculation of, 279–280 interpretation of setup, 293–294 journal entries for, 282–283 summary of, 294–296, 295e fixed manufacturing overhead (FMOH) costs, 276 activity-based costing (ABC) systems and, 291 as capacity planning issue, 277 assigned to each unit of output, 276 assignment of, 278, 278e budgeted, 280, 281 capacity cost as, 277 cost pools for, 278 denominator variance and, 280 flexible budget and, 278 flexible-budget analysis of, 290e in single indirect cost pool, 277 include property, taxes, depreciation and salaries, 276 journal entries for, 282–283 locked in, 276 output-level overhead variance, 280 production-volume variance (PVV) and, 279–280 setup costs, 291 static budget and, 278 static-budget analysis of, 290e variance calculation, 278–279 fixed manufacturing overhead (FMOH) rate variance, 282–283, 284 fixed-cost pool, 530 flat rate target profit percentage, 454 flexible budget, 228, 278 activity-based costing (ABC) systems, 241–242 actual and flexible-budget revenue differences as source of, 233 efficiency component of, 243 fixed cost pool variance source of, 233 for variable setup overhead costs, 291–292 in costing systems, 228 management information system (MIS) and development of, 231–232 preparing, 242 rate component of, 243 variable pool variance source of, 233 flexible-budget contribution margin (CM) variance, 609–610 flexible-budget manufacturing overhead (MOH) cost variances, 276– 277, 284–285 flexible-budget variance, 232–233, 609–610 for fixed and variable manufacturing overhead, 276 level 3, 276 flexible-budget-based variance analysis, 234e forecasted statements, 173 forecasting outcomes, 410 forecasting, software for, 188 formal management control system, 795 fraud, 41 full absorption costing, 329 full product costing, 465, 526 full product costs, 415 G gambling revenue, 596 general ledger, 107 as management tool, 108 control accounts, 109, 110 generally accepted accounting principles (GAAP), 2n, 29n, 38 estimated net realizable value (NRV) method and, 569 period costs under, 35 Global Reporting Initiative (GRI), 14, 15 goal congruence, 795 issues, 722 management accounting control systems (MACS) and, 828 residual income (RI) performance measure and, 836 good information in, good feedback out, 245 goodness of fit, 384 goods for sale, appraisal costs category, 714 carrying costs category in, 713 costs of quality (COQ) category, 714 external failure costs category, 714 www.downloadslide.net SUBJECT INDEX ● 905 goods for sale (continued ) internal failure costs category, 714 ordering costs category in, 713 prevention costs category, 714 purchasing costs category in, 713 shrinkage category, 714 stockout costs category in, 713–714 graph method (to understand model CVP relationships), 61 graphical approach, 430 Grenzplankostenrechnunk (GPK), 534n gross book value, 841–843 gross margin, 64 gross margin percentage, 64 growth component (of operating income), 502–503, 505–506 cost effect, 502 revenue effect, 502 H half-year rule, 762 health and safety, 412 health maintenance organizations (HMOs), 253 heteroscedasticity, 386 high cost allocation rate, 105 high-low method, 366, 367 advantages of, 367 compared to regression analysis, 367–369 disadvantages of, 366 high-operating leverage company, 318 capacity levels in, 319 historical-cost investment measures, 840, 841 homoscedasticity, 386 human capital, 277 hurdle rate, 756 hybrid costing systems, 661 I idle capacity, 277, 327 idle time, 39, 40 bottlenecks and, 424 IFRS-GAAP compliant, 29n IFRS See International Financial Reporting Standards (IFRS) imputed cost, 835 see also required rate of return (ROR) Income Tax Act (ITA) of Canada, 761, 810, 831 income taxes, 64–65 as cash flow consideration, 761 capital cost allowance (CCA) and, 761 generally accepted accounting principles (GAAP) and, 761 operating cash flows and, 761 tax shield implications, 763 incremental cost, 409, 417, 808 incremental cost allocation method, 546–547 Shapley value method as variation on, 547 incremental party, 546 incremental revenue, 417 incremental revenue-allocation method, 600–601 methods of product ranking in, 600–601 product ranking in, 600 ranking as key factor in, 601 Shapley value method, 601–602 weighted Shapley value method, 601 zero-sum game and, 601 incremental unit-time learning model, 391, 393 incremental variable cost, 413 Independence of residuals, 386 independent variable, 365 significance of, 384–385 indirect cost, 26 activity descriptions of, 141 as batch-level costs, 147 as facility-sustaining costs, 147 as output unit-level costs, 147 as product-sustaining costs, 147 budgeted and adjustments, 112–113 cost pool allocation, 147 customer-level, 604 information, 110 overallocated, 112 underallocated, 112 indirect engineered costs, 509 indirect manufacturing costs, 26 indirect manufacturing labour costs, 111 indirect materials cost category, 110 indirect-cost pools, 140, 141 industrial engineering method, 363–364 inflation, 777 accounting for, 777 net present value (NPV) method and, 778 nominal approach to internal consistency, 778 real approach to internal consistency, 778 informal management control system, 795 information technology (IT), 104 reliability and timeliness of inventory data, 714 standard costing and, 251 input mix, 254 input price variance, 235 input-efficiency variances, 235 insource, 415 inspection point, 684 spoilage at various stages of completion, 694–695 Institute of Management Accountants (U.S.), 13 Institute on Corporate Directors (ICD) Blue Ribbon Panel on the Governance of Executive Compensation in Canada, 830 Institutional Shareholder Services Inc (ISS), 829 intangible benefits, 500 intangible costs, 500 integrated cost information systems, 27 integrated management structure, 497 intellectual capital, 500, 828 interactive control systems, 852 intermediate products, 798 internal consistency, 778 internal failure costs, 374 internal rate-of-return (IRR) method, 752, 755, 756, 758–759, 770 compared to net present value (NPV) method, 759–760 computer software for, 758–759 steps to calculate net present value (NPV), 759 internal transfer prices, 799 internal-business-process perspective, 495, 497 innovation process in, 495, 497 operations process in, 497 post sales-service process, 497 International Financial Reporting Standards (IFRS), 2n, 3e, 10, 29n post-investment review, 773 interpolation, 759 intrinsic motivation, 851 inventoriable costs, 34, 35, 179, 318, 329 illustrating flow of, 36 impact on variance analysis, 247 period costs and, 38 inventoriable levels, 335 inventory, 33, 34 direct materials (DM) type, 35 finished goods (FG), 35 work-in-progress (WIP) type, 35 inventory management, 713 appraisal costs category, 714 carrying costs category in, 713 costs of quality (COQ) category, 714 external failure costs category, 714 impact on companies of, 734 internal failure costs category, 714 just-in-time (JIT) model, 718–720 materials requirements planning (MRP), 725–726 ordering costs category in, 713 prevention costs category, 714 purchasing costs category in, 713 shrinkage costs category, 714 stockout costs category in, 713–714 inventory valuation, absorption costing method, 329 distinguishing factors of the absorption and variable costing models, 329 internal policy, 330 variable costing method, 329 invested capital, 473 investment centre, 195 www.downloadslide.net 906 ● SUBJECT INDEX investment financing, 755 information-gathering process for, 755 rate of return (ROR), 755, 777 sources of, 755 investment returns, 755–756 discounted cash flow (DCF) methods, 756 inflation and, 777–778 nominal rate of return, 777 real rate of return, 777 required rate of return (RRR) in, 756 investment timing, 755 investment, shareholders’ equity definition, 840 total assets available definition, 840 total assets employed definition, 840 working capital definition, 840 irrelevant data (information), 410 equipment replacement, 425–426 past costs, 425–426 iteration, 543n J job costing, 97–102 abnormal spoilage and, 695 actual, 100 appropriate situations for, 640 decision-making step in process, 99 evaluation of, 99–100 evaluation step in decisionmaking process, 99–100 expected spoilage and, 695 finished goods inventory, 111 flow of jobs in, 106–107, 106e for manufacturing-sector companies, 99e for merchandising-sector companies, 99e for service-sector companies, 99e future prediction step in decision-making process, 99 implementation of, 99–100 implementation step in decision-making process, 99 non-manufacturing costs and, 111–112 normal costing system, 100 normal spoilage and, 695 normal spoilage attributable to a specific job, 695, 696 normal spoilage common to all jobs and, 695–696 obtain information step in decision-making process, 99 problem identification step in decision-making process, 99 scrap and, 698–699 work-in-process inventory and, 111 job-cost allocation rates, seasonal patterns and, 104 unitized fixed costs and, 104–105 job-cost record, 100, 101e, 107 job-costing system, 97, 103e actual costing system, 100 compared to processing method, 640 constituents of, 98–99 cost allocation as part of, 98 cost assignment part of, 98 cost estimate production, 97 cost object as part of, 98 cost tracing as part of, 98 five-step decision-making process, 99–100 joint cost allocation methods, comparison of methods, 571–572 constant gross margin percentage of net realizable value (NRV) method, 564, 568, 570–571 decision framework for, 564–565 estimated net realizable value (NRV) method, 564, 568–569 irrelevance of in decisionmaking, 573 physical measure method, 564, 566 sales value at splitoff method, 564, 567–568, 572 joint cost processes, 563 joint costs, 562 industries that incur, 563e reasons for allocation of, 563–564 joint products, 562 just-in-time (JIT) purchasing, 718–720 backflush costing and, 727 demand-pull approach, 725 economic order quantity (EOQ) and, 722–725 enterprise resource planning (ERP) system and, 726 lean accounting and, 735 performance measures for, 725 problem-solving urgency, 720 total quality management (TQM) and, 720 value streams and, 735 K Kaizen budgeting approach, 176, 204, 205 continuous improvement and lean manufacturing concept in, 175 targeting reductions in budgeted costs using, 246 Kanban (just-in-time) inventory management, 322 key performance factors (KPFs), 495 key success factors (KSFs), 5, 494–495 as tier in strategy map, 494–495 balanced scorecard (BSC) and, 499 cost and efficiency, innovation, management accountants and, quality, time, L labour costs, 246 direct, 39 idle time, 39, 40 indirect, 39 measuring, 38–39 overhead, 39 overtime premium, 39, 40 rework labour, 39 labour intensive companies, 69 labour-time sheet, 101 lean accounting, 735–737 criticism of, 737 potential limitation of, 737 simpler than traditional product costing, 737 lean manufacturing, 720 lean production systems, 720 features of, 720 learning and growth perspective, 497 learning-curve models, 386, 391–392 cumulative average-time learning model, 391 incorporating effects into prices and standards, 393–394 incremental unit-time learning model, 391, 393 nonlinear cost functions from, 391 level of activity, 362 level of cost driver, 362 leverage, 69 levers of control, 850–851 belief system, 850, 851, 852 boundary system, 850 diagnostic control system, 850 interactive control system, 850, 852 life-cycle budgeted costs, 466, 467e compared to capital budgeting analysis, 753 toxic waste as, 563 life-cycle budgeting, 466 life-cycle costing, 466 life-cycle costing system, 466–467, 470–471 life-cycle pricing, 454 line management, 10 linear cost functions, 360–361 linear equation method, 543–544 steps in, 543–544 linear integrated circuit devices (LICDs), 490, 491 linear programming (LP), 428 constraint specification step in, 429 determine objective step in, 428 objective function of, 428 optimal solution computation step in, 429 using Excel Solver spreadsheet software for, 430–433 linearity within the relevant range, 386–387 liquidity, 767 locked-in cost curve, 461, 461e locked-in costs, 460, 461, 468 at design stage, 461 long-run costing decisions, 456, 457 long-run customer profitability, 618 long-run price cutting, 465 www.downloadslide.net SUBJECT INDEX ● 907 long-run pricing decisions, 454 builds long-run relationships with customers, 456 calculating product costs for, 456–457 cost-based approach to, 457, 459 market-based approach to, 457 relevant costs and, 456 long-term assets, 841–843 long-term capital, 755 long-term investments, 755 long-term production output decisions, 413 low cost allocation rate, 105 M main products, 562 make/buy decision, 415 malus (clawback), 830 management accountants, assigning period costs to distinct output units, 277 balanced scorecard (BSC) design and implementation, 498 business partner skill, challenges for, 298 communicating skills, conflict between cost concepts used for decision making and performance evaluation, 574–575 cost estimation techniques for nonfinancial factors, 298 cost implications of alternative design choices, 461 cross-functional teamwork skill, five-step decision-making process, 410, 411e information to control just-in-time (JIT) purchasing, 725 integrity skill, key success factors (KSF) and, motivating and innovating skills, preparing costs of quality (COQ) reports, 374–375, 376e strategy decisions and, management accounting control system (MACS), 828 financial information used in, 828 nonfinancial information used in, 828 management accounting, compared to financial accounting, 2–3, 3e management by exception, 227 management control system, 174, 795–796 budgets as major feature of, 174–175 designed to help organizational responsibilities of individual managers, 795 effective strategies for, 795 formal and informal systems, 795 goal congruence in, 795 management effort in, 796 motivation in, 795 transfer prices and subunits in, 799 management information system (MIS), 2, 7, 26, 58, 235, 603 barcode scanner data, 251 customer profitability analysis, 617 data quality is crucial for good budgeting, 179 development of flexible budgets, 231–232, 232e for budget decision making, 173 opportunity costs and, 713 past data for budgets, 249 radio frequency identification (RFID), 251 static budget variances and, 229 supplies budgeted and actual data, 227 manufacturing cells, 720 manufacturing costs, 25–26, 30e direct manufacturing labour costs (DML), 25 direct material costs (DM), 25, 28 indirect or manufacturing overhead (MOH), 26 manufacturing overhead costs (MOH), 26, 27 manufacturing cycle efficiency, 371 manufacturing cycle time, 370–371 affect on revenue and costs, 373–374 manufacturing lead time, 370–371, 720 manufacturing overhead, 110, 177 manufacturing overhead allocated, 108 manufacturing overhead applied, 108 manufacturing overhead budget, 184 manufacturing overhead (MOH) costs, 26, 27, 28, 106, 110, 184, 185, 276, 798 cost allocation of, 536–537 fixed, 276 variable, 276 manufacturing overhead records, 111 manufacturing overhead (MOH) variances, decision-making framework for, 277 manufacturing-sector companies, 34 job and process costing for, 99e nonfinancial measures in, 299 substitutable inputs, 254 margin of safety, 67 market intelligence, 455 market share, 319 market size, 319 market-based approach, 457, 459 market-based transfer prices, 799, 804 market-share variance, 613 market-size contribution margin variance, 613–614 favourable, 613–614 unfavourable, 615–616 marketing, markup percentages, 465 master budget, 173, 178e preparing operating, 181–182 time period chosen for, 177 master operating budget, prepping, 181–182 master-budget capacity utilization, 324 performance evaluation and, 328 selling prices and, 326–327 master-budget capacity, 319 demand measures and, 322 product costing and, 326 master-budget fixed overhead rate, 326 material costs, 246 reuse and, 454 material-handling costs, 242 materiality, 27 materials requirements planning (MRP), 725–726 collecting and updating inventory records problem for, 725–726 demand forecasts and, 725 enterprise resource planning (ERP) and, 726 push-through approach of, 725 materials-requisition record, 101 merchandise inventory, 35 merchandising-sector companies, 34 activity-based costing (ABC) systems in, 151–152 job and process costing for, 99e substitutable inputs, 254 Microsoft Forecaster budgeting software, 188, 204 mix variance, 254 mixed costs, 29, 58, 361 models, 58 monopoly, 236 monopsony, 236 moral hazard, 848, 848n motivation, 795 intrinsic, 851 muda (waste), 691 multi-stage production process, 798 intermediate products in, 798 transfer pricing in, 798–799 multicollinearity, 390–391 multinational companies (MNCs), 13–14 corporate governance, 828–830 decentralization advantages in, 797 decentralization drawbacks in, 797 financial performance measurement in, 844–846 negotiated transfer prices and, 807 pricing strategies for, 454, 455 transfer pricing for, 798–799, 810–812 multiple regression, 368, 389–390 cost hierarchies and, 389–390 www.downloadslide.net 908 ● SUBJECT INDEX N negotiated transfer prices, 800, 806–807 multinational companies (MNCs) issues with, 807 net book value, 841–843 net income margin, 64 net income margin percentage, 64 net initial investment cash flow, 764–765 after-tax cash flow from disposal component of, 765 initial machine investment component of, 764 initial working-capital investment component of, 765 net present value (NPV) method, 752, 755, 756–757, 770 compared to internal rate-of-return (IRR) method, 759–760 identify form of and initial cost of investment step in, 756 inflation and, 778 internal consistency and inflation in, 778 performance evaluation and, 771 project cash flow forecast step in, 757, 757e relevant information collection step in, 756–757, 757e net profit margin, 64 nominal approach to inflation, 778 nominal rate of return for investments, 777 non-manufacturing costs, 26 non-manufacturing variance analysis, 297–298 non-productive idle capacity, 322 non-uniform cash flows, 766, 768 non-value-added activities, 149 non-value-added cost, 297, 462 non-value-added manufacturing activities, 371 nonfinancial budgets, 173, 179 purposes of, 173 report on timing and quantity of resources required, 173 nonfinancial performance measures, 297–298, 298, 299 in manufacturing-sector companies, 299 in service-sector companies, 298, 299 nonlinear cost functions, 369 nonproduction costs budget, 186 normal capacity utilization, 324 performance evaluation, 328 selling prices and, 326–327 normal capacity, 319 demand measures and, 322 normal costing system, 100 compare cost-allocation base rate step, 102 compare indirect costs step, 102–103 compared to actual costing system, 105–106 compute total costs for job step, 103 identify chosen cost object step, 100 identify direct job costs step, 100–102 identify indirect costs step, 102 indirect cost rates and, 112 select cost-allocation bases step, 102 normal job-costing system, cost flow and, 106–107 general ledger and, 107, 107e normal rework, 697 common to all jobs, 697 specific jobs, 697 normal spoilage, 682–683 common jobs and job costing for, 695–896 cost allocation for, 693–694 cost of goods manufactured (COGM) and, 682–683 in standard-costing method, 690–691 job costing and, 695 specific jobs and job costing for, 695, 696 normality of residuals, 387 not-for-profit/non-profit (NFP) organizations, benchmarking, 252 data collection by, 253 government and, 596 NRV See estimated net realizable value (NRV) method O objective function, 428, 430, 431, 432 off-limits idle capacity, 322 on-time performance, 371 Ontario Securities Commission (OSC), 830 operating budget, 177, 178 preparing master, 181–182 operating cycle, 193 operating department, 529 operating division, 529 operating expenses, 526 operating income, 318, 457, 463 costs of quality on, 374, 375, 375e effect of production on, 337–338 effect of sales on, 337–338 explanations for differences in, 335–336 favourable variance in, 505–506 growth component in, 502– 503, 505–506 price-recovery component, 503, 505–506 productivity component, 504–506 target, 463–464 operating leverage, 69, 70 operating loop, 205 operating margin, 64 operations costing, 642 opportunity cost of capital, 756 opportunity costs, 418–419, 420, 713, 808 financial accounting systems and, 420 holding inventory and, 421 opportunity-cost approach, 420, 420e, 422 relevant cost of any alternative, 421 optimal product mix, 430 optimization techniques, 428 ordering costs category, 713 Organization for Economic Co-operation and Development (OECD), 15 Hierarchy of Methods, 799, 800, 803 transfer pricing guidelines, 810 organizational structure, 194, 796 decentralization, 796 outlay costs, 808 output unit-level costs, 143, 241 output-level overhead variance, 280 outsource, 415 example of, 416 opportunity costs and, 418–419 overallocated indirect costs, 112 overcosting products, 135, 527 errors in focus from, 135 overpricing and, 135 overtime premium, 39–40 P padding, 182, 197 Pareto diagram, 378 Pareto principle (80-20 rule), 617–618 partial productivity, 506 total factor productivity (TFP) and, 508 payback method, 766–767 advantages of, 767 disadvantages of, 767 liquidity and, 767 non-uniform cash flows, 768 uniform cash flows and, 766–767 payback, 755 peak-load pricing, 470 peanut-butter costing, 135 peeling the onion, 244 perfection standard, 683 perfectly competitive market, 804 transfer price and, 809 performance evaluation measures, 198, 319 absorption costing and, 338 absorption costing and revisions for, 39 accrual accounting mode and, 427 balanced scorecard (BSC) as, 490, 499, 828 conflict in joint allocation concepts for decision making and, 574–575 decision model analysis and, 427 effectiveness attribution, 244 efficiency attribution, 144 financial, 244, 297 for executive compensations, 847–849 master-budget capacity utilization, 328 net present value (NPV) method and, 771 www.downloadslide.net SUBJECT INDEX ● 909 performance evaluation measures (continued ) nonfinancial, 244, 297–298 normal capacity utilization, 328 practical capacity and, 328 responsibility centres, 427 variable costing and, 338 variance analyses as, 244 performance evaluation model, 427 performance reports, 197 performance targets, 172 period costs, 35, 179 appropriate allocation of, 527 inventoriable costs and, 38 period overhead costs, 526 physical measure method, 564, 566 advantages of, 566 disadvantages of, 566–567 in rate regulated situations, 566 physical units, 641 planning, budget as tool of, political, economic, social, technological, environmental, and legal (PESTEL) analysis, 173 post-investment audit, 772–773 practical capacity, 319 actual capacity and, 327 performance evaluation and, 328 product costing and, 325–326 supply measures and, 321–322 predatory pricing, 469, 607 dumping and, 470 pricing below average variable costs, 469 predetermined indirect-cost rate, 199 predictable prices, 456 prediction errors (in relevant costs), 721–722 prevention costs, 374 previous department costs, 662 price discounting, 607–608 multiple factors in, 607 price discrimination, 468, 607 elements of laws, 468 price-recovery component (of operating income), cost effect, 503–504 revenue effect, 503 pricing strategies, 453 advantages for using unitized fixed costs in, 465 competitor influences on, 454, 459 cost-based approach, 457, 459 cost-plus, 454, 462–463 cost-plus compared to target, 465–466 costs influence on, 454 cradle-to-grave, 454 customer influences on, 454 factors in, 454–455 fair and square, 453 fairness of, 548 for companies in competitive markets, 457 for companies in less competitive markets, 454, 457 for companies in non-competitive markets, 459 for companies selling commodity products, 454 full product cost recovery advantage in, 465 full product costing, 465 life-cycle, 454 market-based approach, 457 multiyear client perspective, 465 predatory, 469 price stability advantage in, 465 qualitative factors in, 466–467 return on investment (ROI) cost-plus, 464 simplicity advantage in, 465 target, 454 time and materials, 465–466 time horizon and, 454–455 unreasonably low, 469 primary party, 546 primary product, 600 prime costs, 27–28 priority approach to budgeting, 175 difficult decisions in, 175 strategic plan in, 175 pro forma financial results, 172 pro forma income statements, 173, 177 pro forma statements, 173 as forecasts not historical outcomes, 173 process-costing method of cost allocation, 639–640 accounting challenges, 640, 641 compared to job-costing method, 640 comparing weighted-average and FIFO methods, 657–659 conversion cost pool, 640 decision-making steps in, 640–641 direct materials (DM) cost pool, 640 first-in, first-out (FIFO) method, 642, 653–657 hybrids, 661–662 standard-costing method, 642, 653–657 transferred-in costs in, 661–662 variances in, 660 weighted average (WA), 642 process-costing system, 98 approach R (recognized) to spoilage in, 683–685 approach U (uncounted) to spoilage in, 683–685 for manufacturing-sector companies, 99e for merchandising-sector companies, 99e for service-sector companies, 99e inspection point in production process, 684 journal entries for, 648–649 spoilage and, 683–684 procurement models, 714 assumptions by, 714 economic order quantity (EOQ), 714–715 product bundle, 598 revenue allocation from, 598 product cost, 40, 41–42, 42e activity-based costing (ABC) and accurate, 140 using activity-based costing (ABC) systems, 146e product differentiation, 491, 492, 492 product level, 135 costs, 147 product life cycle, 466 product life-cycle budget, 467 product life-cycle reports, 467–468 benefits of, 468 product output, batch costs and, 242 product overcosting, 135 pricing decision errors from, 135 product supply, influence on pricing strategies, 454 product undercosting, 135 pricing decision errors from, 135 product-cost crosssubsidization, 136 product-mix decisions, 422 in long term, 422 in short term, 422 product-specific information, 599 product-sustaining costs, 143 production budget, 182 preparing, 182 production byproduct method, 576–578 production capacity, 319, 320e production denominator level, 278 production denominator volume, 278 production department, 529 production division, 529 production output decisions, 413 insource or outsource, 415 long-term, 413, 415 make or buy, 415 short-term, 413 production, environmental costs of, 454 production-volume variance (PVV), 279–280, 320 analysis of, 289 interpretation of, 281–282, 281e productivity component (of operating income), 504–506 partial productivity, 506, 507, 507e total factor productivity (TFP), 507 productivity improvement measures, 506–507 products, 562 byproducts, 562–563 classification of, 562, 562e joint, 562 main, 562 professional ethics, 12–13, 21–23 profit centre, 195, 359 profit increase, profit maximization problems, 430 profit plan, 173 www.downloadslide.net 910 ● SUBJECT INDEX profit split method (PSM), 811 profit-volume graph, 68e project investment, 753, 753e proration approach, 112, 113–114 end-of-period adjustments, 252 proration, 113–114 public service institutions, 152 purchase order lead time, 714 purchasing costs category, 713 Q qualitative factors, 412 quantitative analysis method, 365 estimating a cost function using, 365–366 high-low form compared to regression analysis, 367–368 high-low form of, 366, 367 regression analysis form of, 366 quantitative factors, 412 relevant-cost analysis and, 412 R radio frequency identification (RFID), 251, 714 rate of return (ROR) on investments, 755 rate variance, 235 computing formula for, 237 explaining, 236 input illustration, 236–237 input presentation, 239–241 interpretation of level analyses, 237–238 reasons for, 237–238 unfavourable (U) variance and, 243 variable overhead, 287, 288 real approach to inflation, 778 real options, 771 real rate of return for investments, 777 receipt time, 370 reciprocal allocation method, 537, 542–543, 542e advantages and disadvantages of, 544 linear equation model, 543–544 reciprocated cost, 542 recycling, 454, 471 redesigning, 495 reengineering, 495 regression analysis, 366, 368, 383, 385e accuracy of, 369 coefficient of determination, 384 compared to high-low method, 367–369 estimating the regression line, 383–384 goodness of fit, 384 standard error of the estimated coefficient, 385 standard error of the regression, 384 reimbursement costs, 548 contracting and, 648 related parties, 810 relative performance evaluation, 847 relevance, 410–411 key features in, 413e, 416–417 product-mix decisions and, 422 relevant costs, 410, 411 estimating, 721 identification of, 413 long-run pricing decisions and, 456 predicting, 721–722 short-run pricing decisions and, 455 relevant data (information), 410 key features in, 413e relevant range, 28, 362 relevant revenues, 410 relevant-cost analysis, 410, 411, 412, 415 incorrect general assumptions in, 417 irrelevant costs may cause problems for, 417–418 quantitative factors in, 412 same unit costs at different output levels problem for, 418 unit-cost data can mislead in, 417–418 relevant-revenue analysis, 415 reorder point, 716 required rate of return (ROR), 835 required rate of return (RRR), 756 resale price method (RPM), 800, 811 research and development (R&D), 4, 5, 364, 456 as discretionary cost, 510 as strategic investment, 771 balanced scorecard (BSC) and, 499 residual income (RI) performance measure, 832, 835–836, 839 goal congruence and, 836 required rate of return (ROR) and, 835 weighted-average cost of capital (WACC) and, 835 residual term, 386 resource consumption accounting (RCA), 534, 534n responsibility accounting, 195 applied to budgets, 196 behaviour affects, 195–196 controllable costs and, 196 information and knowledge focuses of, 197 variance feedback, 186 responsibility centre, 194–195 cost centre, 195 in decentralized companies, 797–798 investment centre, 195 performance reports for, 197 profit centre, 195 revenue centre, 195 restricted stock units (RSUs), 831 return on assets (ROA), 811 return on equity (ROE) model, 834n return on investment (ROI) cost-plus pricing method, 464 return on investment (ROI) performance measure, 832, 833–835, 839 calculating foreign division in foreign currency, 844–845 calculating foreign division in local currency, 845 current cost and, 840–841 incorporates investment base into management performance measure, 834 see also accounting rate of return (ARR); accrual accounting rate of return (AARR) return on investment (ROI), 463, 464, 490, 768 target, 525 return on sales (ROS) performance measure, 832, 837–838, 839 revenue allocation, 597 balanced scorecard (BSC) and, 599 governments’ use of for tax revenue, 597–598 revenue budget, 181 revenue centre, 195 revenue driver, 74 revenue per available seat mile (RASM), 299 revenue variance, 230 revenue-allocation base, 599 manufacturing costs, 599 physical units, 599–600 produce revenue,, 599, 600 selling prices, 599 revenue-allocation methods, 597–598 customer activity-based costing (ABC), 603 decisions about, 598–599 for product bundles, 598 incremental revenueallocation, 600–601 management’s judgement, 603 stand-alone, 599–600 revenue-sharing contracts, 596 revenues, 597 reverse engineering, 459, 460 rework, 682, 683e, 691 abnormal, 697–698 costs of goods manufactured (COGM) and, 696 costs, 461 normal, 697 units and scrap, 696–697 reworked units, 696–697 rightsizing, 509 risk evaluation, 66 risk neutral, 68 risk tolerance, 68 risk, 68 rolling budget, 177 royalty contracts, 596 S safety stock, 717–718 sale byproduct method, 576, 578 sales mix, 72 sales value at splitoff method, 564, 567–568 benefits of, 568, 572 sales-mix contribution margin variance, 610–611, 612e favourable, 611 interpretation of level revenue, 612–613 underlying concept of, 611 www.downloadslide.net SUBJECT INDEX ● 911 sales-quantity contribution margin variance, 611–612, 612e sales-volume contribution margin (CM) variance, 601 sales-volume variance, 232–233 salvage value, 762 Sarbanes-Oxley Act (SOX), 12, 829 say on pay, 829 scaleability, 490 scrap, 562, 682, 683e, 691 accounting for at time of production, 699–700 accounting for at time of sale, 698 byproducts and, 698 common to all jobs, 699 inventory costing for, 698 physical tracking of, 698 planning and control of, 698 reworked units and, 696–697 specific job attribution, 698–699 Securities and Exchange Commission, 829 self-liquidating cycle, 193 sell or process further decision, 573–574 necessary assumptions for, 574 selling price, reducing, 66 semivariable cost, 361 sensitivity analysis, 68, 467, 760 as form of strategic analysis, 204–205 separable costs, 563 sequential method, 539–540 sequential tracking, 727 backflush costing as alternative to, 727 sequential-tracking costing system, 727 trigger points in, 727 serial correlation, 386 service department, 529 service-sector companies, 34 activity-based costing (ABC) systems in, 151–152 capacity cost issues in, 328 cost leadership for profitability, 298 customer satisfaction in, 298 examination of value chain by, 298 job and process costing for, 99e period overhead costs in, 277 service customization for profitability, 198 substitutable inputs, 254 time and materials pricing method used by, 465–466 service-sustaining costs, 143 setup hours, 142, 143, 720 Shapley value method, 547, 601–602 common costs and, 547 short-run costing decisions, 455 relevant costs for, 455 short-run customer profitability, 618 short-run pricing decisions, 455 irrelevant costs affect factor in, 456 opportunistic factor in, 456 strategic factors in, 455–456 time horizon effect on, 456 short-run profitability reports, 618 short-term production output decisions, 413 shrinkage costs category, 714 simple costing systems, 135–136 example of, 136–137 overview of, 137–138, 138e simple regression, 368 single-rate cost-allocation method, 530 single-rate method, 530, 531 benefits of, 533 budgeted rates in, 534 compared to dual-rate method, 533–534 problems with, 533 small and medium enterprise (SME) benchmark tool, 252 source document, 100, 102e, 108, 109 electronic, 106 Special Import Measures Act (SIMA), 470 special orders, 413–414 specification analysis, 385–386 constant variance of residuals, 386 independence of residuals, 386 linearity within the relevant range, 385–396 normality of residuals, 387 splitoff point, 563 relative sales value at, 564 spoilage, 682, 683e abnormal, 683 in first-in, first-out (FIFO) process-costing method, 685–686, 687–688 in standard-costing method, 686 in weighted-average (WA) process-costing method, 685–690 inspection point at various completion stages, 694–695 normal, 682 process-costing system and, 683–684 recognized (approach R) in process-costing system, 683–685 uncounted (approach U) in process-costing system, 683–685 stable prices, 456 staff management, 10 stand-alone, 599 stand-alone cost allocation method, 546 stand-alone revenue-allocation methods, 599–600 advantages and disadvantages of approaches, 599–600 as weighted-average method, 599 standard, 174, 250, 254 advantages of using average external, 250 agility and, 298 dangers of relying on, 174 defined, 228 time-and-motion studies for, 250 Standard & Poor’s, 828 standard cost, 250 advantage of, 252 as basis for budgeted costs, 228 control feature of, 251 information technology and, 251 standard-costing method, 642, 643, 653–657 computations for, 659–660 cost data from, 325 spoilage and, 686, 690–691 weakness of, 658 standard error of the estimated coefficient, 385 standard error of the regression, 384 standard input, 250 substitutable input and, 254 statement of comprehensive income, 33, 34e, 37e, 107 flow of inventoriable costs in, 36 statements of cash flow, 173 static budget, 227–228, 278 flexible-budget variance source of, 232 in costing systems, 28 sales-volume variance source of, 232 static-budget contribution margin variance, 608–609 static-budget variances, 229–230, 230e contribution margin, 608–609 statistical process control (SPC), 377 statistical quality control (SQC), 377 step allocation method, 537, 539–540 step cost function, 370 step-down method, 537, 541, 541e advantages and disadvantages of, 544 stockout costs category, 713–714 strategic analysis, 175, 176e as form of sensitivity analysis, 204–205 budgets as part of, 175 choice between value and cost leadership, 491, 492 five competitive forces that all corporations face, 490–491, 491e key success factors (KSFs) in, 492–493, 493e of competitive environment, 492 of competitors, 490, 491 of equivalent products, 490, 491 of potential market entrants, 490, 491 of price-setting power of customers, 490, 491 of price-setting power of suppliers, 490, 491 of profitability, 505e time period of, 501 strategic cost management, 297 www.downloadslide.net 912 ● SUBJECT INDEX strategic investments, 769 research and development (R&D) as, 771 strategic management accounting, 252 strategy, 3, 19, 490 balanced scorecard (BSC) as measure of, 490 competitive corporate, 490 cost leadership, 3n, 492 differentiation, 3n information analysis and appropriate choice of, SWOT tool for formulation of, 490 value leadership, 492 strategy map, 494, 494e as first step in designing a balanced scorecard (BSC), 494 key success factors as tier in, 494–495 strengths, weaknesses, opportunities and threats (SWOT) tool, 490 stretch goals, 174, 182 subsidiary ledgers, 109–110, 109e advertising costs, 111 employee labour records, 111 finished inventory by jobs, 111 individual jobs, 110e manufacturing overheads by month, 111 work-in-process inventory by jobs, 111 substitutable direct materials inputs, 254 substitutable inputs, 254 direct materials efficiency and, 256 subunit, 796 Sullivan principles, 852 sunk costs, 412 super-variable costing, 342 supplier-managed inventory, 721 supply chain, 5, 720 enterprise resource planning (ERP) for, 726 estimating relevant costs in, 721 supply measures, 321–322 practical capacity and, 321–322 theoretical capacity and, 321–322 supply-chain analysis, 5, 5e cost management and, supply-chain cost management, 720–721 supply-chain management, 713 supply-chain strategies, 713 support department, 529 sustainability accounting, 14–15, 14e SWOT See strengths, weaknesses, opportunities and threats (SWOT) tool, synchronous tracking, 727 T target cost per unit, 460 target costing, effects of mismanagement of, 462 steps in developing, 459–460 target net income, 64–65 income taxes and, 65 target operating income per unit, 460, 460, 463–464 target price, 459 choosing as step in development of, 460 competitor’s products and development of, 459 cost analysis step for developing, 460 customer requirements and development of, 459 derive target cost per unit as step in developing, 460 product development to satisfy customer needs step in implementing, 459 vale engineering step in development of, 460 target pricing, 454, 525 compared to cost-plus pricing, 465–466 cost driver identification role in, 465 cost information role in, 465 target rate of return on investment (ROI), 463 target return on investment (ROI), 525 targeting, 173 tax shields, 761–762 capital cost allowance (CCA) as, 762 income tax implications, 763 technical considerations, 9–10 terminal disposal value of investment, 764, 765 machine disposal after-tax cash flow component of, 765 working capital recovery after-tax cash flow component of, 765 theoretical capacity, 319 product costing and, 325 supply measures and, 321–322 theory of constraints (TOC), 423 actions to relieve bottlenecks, 424–425 bottleneck management, 425 bottlenecks and, 423 compared to activity-based costing (ABC) systems, 425 continuous evaluation process in, 423 measurement and control of investments, 423 measurement and control of operational expenses, 423 measurement and control of throughput, 423 not useful for long-run cost management, 425 organizational goals from income and, 423 throughput and, 423 throughput costing, 342, 342e, 343–344, 413 advocates of, 344 theory of constraints (TOC) and, 423 time, as a cost, 371–372, 373e as cost driver, 370 as performance driver, 371 as strategy driver, 370 average waiting, 372 bottleneck, 372, 374 customer-response, 370–371 delivery, 371 manufacturing cycle (lead), 370 on-time performance, 371 receipt, 370 relevant costs of, 372, 373e relevant revenues of, 373–374 time-adjusted rate of return, 758 time and materials pricing method, 465–466 time-and-motion studies, 250 time-driven activity-based costing (TDABC), 148 time driver, 371 types of, 371 time horizon, 361–362 discounted cash flow (DCF) and, 756 financial performance measures and, 839–840 long-run pricing decisions, 454, 456 pricing strategies and, 454–455 short-run pricing decisions, 455, 456 strategic analysis and, 501 time value of money, 756 as key feature of discounted cash flow (DCF), 756 Toronto Stock Exchange (TSX), 828, 829, 830 total-alternatives approach, 419–420, 419e, 420e, 421 total costs, 31–32 total factor productivity (TFP), 507 advantages of, 508 calculating, 507–508 partial productivity and, 508 total quality management (TQM), 5, 720 toxic waste, 563 as life-cycle cost, 563 traditional (historic) incremental/decremental approach to budgeting, 175 criticisms of, 199e flaws in, 175 transactional net margin method (TNMM), 811 transactions, 108 transfer price, 799 comparable uncontrolled price (CUP), 800 cost-based, 800, 805–806 criteria for evaluating, 800–801 distress prices and, 804–805 dual pricing, 807–808 guidelines for, 808–809 intermediate market and, 809 internal, 799 interprovincial, 803 market-based, 799, 804 multinational companies (MNCs) and, 810–812 negotiated, 800, 806–807 www.downloadslide.net SUBJECT INDEX ● 913 transfer price (continued ) opportunity and incremental costs, 808–809 perfectly competitive market and, 804, 809 practicalities of, 801–803 reasonable, 800 resale price method (RPM), 800 taxes and, 803–804 transfer pricing, 798–799 multinational companies (MNCs) and, 798–799 transfer pricing methods, 799–800 transferred-in costs, 661–662 common pitfalls in, 667 first-in, first-out (FFO) process-costing method and, 665–667 weighted-average (WA) process-costing method and, 663–664 trial-and-error approach, 429 trigger points, 727 backflush costing and, 728–730 triple bottom line (TBL), 14, 15e responsibility, 498 U U.S Internal Revenue Service (IRS), 800 uncertainty, 70 characteristics of, 71 underallocated indirect costs, 112 adjusted allocation-rate approach to, 112–113 proration approach to, 112, 113–114 write-off to cost of goods sold approach, 112, 114 undercosting products, 135, 527 errors in focus from, 135 underpricing and, 135 underpreciated capital cost (UCC), 762 unfavourable (U) variance, 227, 242, 243 efficiency component of flexible budget, 243 rate component of flexible budget, 243 reasons for efficiency variance, 243, 293 uniform cash flows, 766 unit costs, 28, 31–32 unit level, 135 unitized fixed costs, 465 unreasonably low prices, 469 determination factors or, 469 unused capacity, 508 discretionary costs and, 509 downsizing and, 509–510 engineered costs and, 509 management of, 509–510 rightsizing and, 509–510 upfront costs, 70 upside potential, upstream costs, 26 usage variances, 235 V value analysis, 460 choose modifications that have greatest customer valuation, 460 cost incurrence key term in, 460 cross-functional team members, 460 evaluates design innovations and modifications, 460 locked-in costs key term in, 460, 461 value chain, 4, 100, 414 activity-based costing (ABC) in, 140 business functions in, 457 functions, 241 service-sector companies and, 298 value engineering evaluates all aspects of, 462 value engineering, 462 effects of mismanagement of, 462 evaluates all aspects of value chain, 462 value leadership strategy, 490, 491 balanced scorecard (BSC) and, 500 decision framework and choice of, 492 value leadership, 3, 492 value proposition, 297 value streams, 735 just-in-time (JIT) purchasing and, 735 value-added activities, 149, 151 ecological responsibility as, 471 value-added cost, 297, 462 value-added manufacturing activities, 371 value-chain analysis, 4, 19 customer service function of, 4e, distribution function of, 4e, marketing function of, 4, 4e product, services or processes design function of, 4, 4e production function of, 4, 4e research and development (R&D) function of, 4, 4e variable cost (VC), 28, 58, 413 alternative structures, 68 cost driver of, 30 dual-rate method and, 535 manufacturing, 58 non-manufacturing, 58 single-rate method and, 535 transforming a fixed cost to, 31 variable cost coverage, 466 variable-cost pool, 530 variable costing, 329, 331, 343–344, 343e breakeven point (BEP) under, 344–345 comparative income statements, 334 compared to absorption costing, 331–332 controversy, 344 inventory valuation method, 329 operating income under, 335, 337–339, 339e performance evaluation and, 338 variable manufacturing costs, 329 variable manufacturing overhead (VMOH) costs, 229, 276 activity-based costing (ABC) systems and, 291 assigned to each unit of output, 276 cost pool, 284 flexible budget preparation for, 291–292 flexible-budget analysis of, 290e journal entries for, 290–291 manufacturing labour portion of, 289 setup costs, 291 static-budget analysis of, 290e variable manufacturing overhead (VMOH) costs rate variance, 287 interpretation of setup of, 293 level 3, 287–288 variable manufacturing overhead (VMOH) costs variance, 285–286 analyses of, 286–287, 286e calculations, 285–286 journal entries for, 290–291 level analysis, 286–287 level interpretation, 287 level efficiency, 287–288 summary of, 294–296, 295e underallocated or overallocated costs and, 290 variable overhead efficiency variance, 287–288 variable overhead rate variance, 287, 288 variance analysis, 226, 227, 330 activity-based costing (ABC) systems and, 291–292, 293 as management control tool, 227 assessment and maintenance of profitability by, 246 benchmarking and, 252 continuous improvement from, 246–247 contribution margin, 607–608 cost, 233e cost systems used and interpretation of, 289 costing of products and services in, 527 denominator-level variance, 280 difference between meaning of and arithmetic meaning, 230 direct materials (DM) framework and, 227 fixed manufacturing batchlevel setup overhead costs, 291–292 fixed manufacturing overhead (MOH) costs, 278–279, 280e flexible-budget, 232–233, 242 flexible-budget-based-level 2, 234e flexible-budget contribution margin (CM), 609–610 flexible-budget manufacturing overhead (MOH) cost, 276–277 impact of inventories on, 247 interpretation of fixed setup overhead rate variance, 293–294 www.downloadslide.net 914 ● SUBJECT INDEX variance analysis (continued ) interpretation of level results, 234–235, 234e interpretation of level results, 237–238, 288–289 interpretation of level results, 231–232, 232e learning from, 246–247 market-share variance, 613 non-manufacturing, 297–298 operating income and, 505–506 output-level overhead variance, 280 performance evaluation usage of, 244 process-costing and, 660 production-volume variance (PVV), 279–280, 320 reasons to investigate, 245 rules for investigation of, 245 sales-volume, 232–233 sales-volume contribution margin (CM), 610 standard-costing systems and, 730–731 static-budget contribution margin, 608–609 variable manufacturing batch-level setup overhead costs, 291–292 variable manufacturing overhead (VMOH) costs, 285–286 variable overhead efficiency variance, 287–288 variable overhead rate variance, 287, 288 variances, 196, 227 favourable (F), 227 unfavourable (U), 227 vendor-managed inventory, 721 vertical integration, 415 volume, 278 W weighted average cost of capital (WACC), 772, 778–779, 835 residual income (RI) performance measure and, 835 weighted Shapley value method, 601 weighted-average (WA) process-costing method, 642, 643 ending WIP inventory valuation using, 646–647 spoilage in, 685–690 transferred-in costs and, 663–664 with beginning (BI WIP) and ending inventory (EI WIP), 650–653 with no beginning WIP inventory (BI WIP), 644–646 womb-to-tomb costing strategy, 466 work-in-progress control account, 110 job-cost record and, 111 work-in-progress inventory (WIP), 35, 36, 38, 106, 179, 284, 640, 642, 643 beginning (BI), 643 ending (EI), 643, 646–647 work-in-progress, 35 work-measurement method, 363–364 working capital cycle, 193 working capital, 755 write-off to cost of goods sold approach, 112, 114 simplest approach, 114–115 Y yield, 254 yield variance, 254 Z zero-based budgeting approach, 175 identifies significant cost savings, 175 organizational resistance to, 175 zero-based methodology, 175 zero-sum game, 601 ... Requests at www.pearsoncanada.ca 10 [CKV] Library and Archives Canada Cataloguing in Publication Horngren, Charles T., 1926-, author          Cost accounting : a managerial emphasis / Charles T Horngren, ... and Management Accounting Strategic Decisions and Management Accounting Value-Chain And Supply-Chain Analysis and Key Success Factors Value-Chain Analysis Supply-Chain Analysis Key Success Factors... Overhead Variance Analysis 286 Level Variable Manufacturing Overhead Rate and Efficiency Variances 287 Journal Entries for Variable Overhead Costs and Variances 290 Activity-Based Costing and Variance