A Managerial Emphasis

Charles I Horngren
Stanford University

Srikant M. Datar
Harvard University

George Foster
Stanford University

Madhav V. Rajan
Stanford University

Christopher Ittner
University of Pennsylvania

Pearson Education International

Thirteenth Edition

'Contents
1 The Accountant's Role in the Organization 28
Xerox Keeps Its Eye on Key Success Factors: Copier Prices

Are Down, but Profits Are Up

Management Accounting, Financial Accounting, and
Cost Accounting 29
Strategic Decisions and the Management
Accountant 31
Value-Chain and Supply-Chain Analysis and Key
Success Factors 32
Value-Chain Analysis 32
Supply-Chain Analysis 33
Key Success Factors 33
Decision Making, Planning, and Control: The Five-Step
Decision-Making Process 35
Key Management Accounting Guidelines 37
Cost-Benefit Approach 38
Behavorial and Technical Considerations 38
Different Costs for Different Purposes 38
Organization Structure and the Management
Accountant 39
Line and Staff Relationships 39
The Chief Financial Officer and the Controller 39
Professional Ethics 40
Concepts in Action: Management Accounting
Beyond the Numbers
Ethical Guidelines 41
Typical Ethical Challenges 43
Problem for Self-Study 44 I Decision Points 44 I Terms
to Learn 45 I Assignment Material 45 I Questions 45 I
Exercises 46 I Problems 48 I Collaborative Learning
Problem 50

2 An Introduction To Cost Terms and

Purposes 52
GM Struggles Under the Weight of Its Fixed Costs
Costs and Cost Terminology 53
Direct Costs and Indirect Costs 54
An Example of Cost Assignment 54
Factors Affecting Direct/Indirect Cost
Classifications 55
Cost-Behavior Patterns: Variable Costs and Fixed
Costs 56
Cost Drivers 58
Relevant Range 58
Concepts in Action: How Flexcar Helps Reduce
Business Transportation Costs

1O

Relationships of Types of Costs 60

Total Costs and Unit Costs 60
Unit Costs 60
Use Unit Costs Cautiously 61
Manufacturing-, Merchandising-, and Service-Sector
Companies 62
Types of Inventory, Inventoriable Costs, and Period
Costs 62
Types of Inventory 62
Commonly Used Classifications of Manufacturing
Costs 62
Inventoriable Costs 63
Period Costs 63
Illustrating the Flow of Inventoriable Costs and
Period Costs 64
Manufacturing-Sector Example 64
Recap of Inventoriable Costs and Period Costs 66
Prime Costs and Conversion Costs 68
Measuring Costs Requires Judgment 69
Measuring Labor Costs 69
Overtime Premium and Idle Time 69
Benefits of Defining Accounting Terms 70
Different Meanings of Product Costs 71
A Framework for Cost Accounting and Cost
Management 72
Calculating the Cost of Products, Services, and Other
Cost Objects 72
Obtaining Information for Planning and Control and
Performance Evaluation 72
Analyzing the Relevant Information for Making
Decisions 73
Problem for Self-Study 73 I Decision Points 76 I Terms
to Learn 77 I Assignment Material 77 I Questions 77 I
Exercises 77 I Problems 81 I Collaborative Learning
Problem 85

3 Cost-Volume-Profit Analysis 86
Tiffany Tinkers with Its Sales Mixand Takes a CostVolume-Profit Gamble
Essentials of CVP Analysis 87
Equation Method 90
Contribution Margin Method 90
Graph Method 90
Cost-Volume-Profit Assumptions 91
Breakeven Point and Target Income 92
Target Operating Income 93

CONTENTS 11
Target Net Income and Income Taxes 94
Using CVP Analysis for Decision Making 95
Decision to Advertise 95
Decision to Reduce Selling Price 96
Sensitivity Analysis and Uncertainty 97
Cost Planning and CVP 98
Alternative Fixed-Cost/Variable-Cost Structures 98
Operating Leverage 99
Effects of Sales Mix on Income 101
Multiple Cost Drivers 102
Concepts in Action: Sky-High Fixed Costs Trouble
XM Satellite Radio
CVP Analysis in Service and Nonprofit
Organizations 104
Contribution Margin versus Gross Margin 105
Problem for Self-Study 105 I Decision Points 106
APPENDIX: Decision Models and Uncertainty 107
Terms to Learn 110 I Assignment Material 111 I
Questions 111 I Exercises 111 I Problems 115 I
Collaborative Learning Problem 121

4 Job Costing 122

Job Costing Is Job 1 at Sutton Siding
Building-Block Concepts of Costing Systems 123
Job-Costing and Process-Costing Systems 125
Job Costing: An Example 126
Actual Costing 127
General Approach to Job Costing 127
The Role of Technology 131
Concepts in Action: Job Costing on the NextGeneration Military Fighter Plane
Time Period Used to Compute Indirect-Cost Rates 132
Normal Costing 134
A Normal Job-Costing System in Manufacturing 135
General Ledger 136
Explanations of Transactions 136
Subsidiary Ledgers 138
Budgeted Indirect Costs and End-of-Accounting-Year
Adjustments 141
Adjusted Allocation-Rate Approach 142
Proration Approach 143
Write-Off to Cost of Goods Sold Approach 145
Choice Among Approaches 145
Multiple Overhead Cost Pools 145
Variations from Normal Costing: A Service-Sector
Example 146
Problem for Self-Study 147 I Decision Points 149 I
Terms to Learn 150 I Assignment Material 150 I
Questions 150 I Exercises 151 I Problems 157 I
Collaborative Learning Problem 161

5 Activity-Based Costing and Activity-Based

Management 162
Mystery Solved: London Police Spend $1 Billion-Plus a Year
on Paperwork versus Fighting Crime, ABC Analysis
Uncovers

Broad Averaging and Its Consequences 163

Undercosting and Overcosting 163
Product-Cost Cross-Subsidization 164
Simple Costing System at Plastim Corporation 165
Design, Manufacturing, and Distribution
Processes 165
Simple Costing System Using a Single Indirect-Cost
Pool 166
Applying the Five-Step Decision-Making Process at
Plastim 168
Refining a Costing System 169
Activity-Based Costing Systems 170
Plastim's ABC System 170
Cost Hierarchies 173
Implementing Activity-Based Costing at Plastim 174
Comparing Alternative Costing Systems 178
Using ABC Systems for Improving Cost Management
and Profitability 178
Pricing and Product-Mix Decisions 178
Cost Reduction and Process Improvement
Decisions 179
Design Decisions 181
Planning and Managing Activities 181
Activity-Based Costing and Department Costing
Systems 181
Implementing ABC Systems 182
ABC in Service and Merchandising Companies 183
Concepts in Action: Successfully Championing ABC
Concepts in Action: Time-Driven Activity-Based
Costing at Charles Schwab
Problem for Self-Study 186 I Decision Points 188 I
Terms to Learn 189 I Assignment Material 189 I
Questions 189 I Exercises 190 I Problems 196 I
Collaborative Learning Problem 204

6 Master Budget and Responsibility

Accounting 206
"Scrimping" at the Ritz: Master Budgets

Budgets and the Budgeting Cycle 207

Strategic Plans and Operating Plans 207
Budgeting Cycle and Master Budget 208
Advantages of Budgets 209
Coordination and Communication 209
Framework for Judging Performance and Facilitating
Learning 209
Motivating Managers and Other Employees 210
Challenges in Administering Budgets 210
Time Coverage of Budgets 211Steps in Developing an Operating Budget 211
Computer-Based Financial Planning Models 220
Kaizen Budgeting 221
Concepts in Action: Web-Enabled Budgeting and
Hendrick Motorsports

Budgeting and Responsibility Accounting 223

Organization Structure and Responsibility 223
Feedback 224
Responsibility and Controllability 224

12 CONTENTS

Human Aspects of Budgeting 225

Budgeting in Multinational Companies 227
Problem for Self-Study 227 I Decision Points 228

APPENDIX: The Cash Budget

229

Terms to Learn 235 I Assignment Material 235 I

Questions 235 I Exercises 235 I Problems 239 I
Collaborative Learning Problem 247

7 Flexible Budgets, Direct-Cost Variances, and

Mangement Control 250
Starbucks Tries to Keep a Lid on Costs Amid Expansion
The Use of Variances 251
Static Budgets and Static-Budget Variances 252
Flexible Budgets 254
Flexible-Budget Variances and Sales-Volume
Variances 254
Sales-Volume Variances 255
Flexible-Budget Variances 256
Price Variances and Efficiency Variances for
Direct-Cost Inputs 257
Obtaining Budgeted, Input Prices and Budgeted Input
Quantities 257
Data for Calculating Webb's Price Variances and
Efficiency Variances 259
Price Variances 259
Efficiency Variance 261
Summary of Variances 261
Concepts in Action: Weapons Against Waste: Sandoz
Uses Variance Analysis to Cut Its Product
Costs and Improve Profits

Journal Entries Using Standard Costs 263

Implementing Standard Costing 265
Standard Costing and Information Technology 265
Wide Applicability of Standard Costing 265
Management Uses of Variances 266
Multiple Causes of Variances 266
When to Investigate Variances 266
Performance Measurement Using Variances 266
Organization Learning 267
Continuous Improvement 268
Financial and Nonfinancial Performance
Measures 268
Variance Analysis and Activity-Based Costing 268
Relating Batch Costs to Product Output 268
Price and Efficiency Variances 269
Focus on Hierarchy 270
Benchmarking and Variance Analysis 270
Problem for Self-Study 272 I Decision Points 273 I
Terms to Learn 274 I Assignment Material 274 I
Questions 274 I Exercises 274 I Problems 278 I
Collaborative Learning Problem 285

8 Flexible Budgets, Overhead Cost Variances, and

Management Control 286
CEO Claims He Didn't See Variances, but Jurors Did

Planning of Variable and Fixed Overhead Costs 287

Planning Variable Overhead Costs 287
Planning Fixed Overhead Costs 288
Standard Costing at Webb Company 288
Developing Budgeted Variable Overhead Cost
Rates 288
Variable Overhead Cost Variances 289
Flexible-Budget Analysis'" 290
Variable Overhead Efficiency Variance 290
Variable Overhead Spending Variance 291
Journal Entries for Variable Overhead Costs and
Variances 293
Developing Budgeted Fixed Overhead Rates 293
Fixed Overhead Cost Variances 295
Production-Volume Variance 296
Computing the Production-Volume Variance 296
Interpreting the Production-Volume Variance 297
Journal Entries for Fixed Overhead Costs and
Variances 298
Concepts in Action: Variance Analysis and Standard
Costing Help Sandoz Manage Its Overhead
Costs

Integrated Analysis of Overhead Cost Variances 301

4-Variance Analysis 301
Combined Variance Analysis 301
Production-Volume Variance and Sales-Volume
Variance 303
Financial and Nonfinancial Performance
Measures 305
Overhead Cost Variances in Nonmanufacturing and
Service Settings 305
Activity-Based Costing and Variance Analysis 306
Flexible Budget and Variance Analysis for Variable
Setup Overhead Costs 307
Flexible Budget and Variance Analysis for Fixed
Setup Overhead Costs 308
Problem for Self-Study 310 I Decision Points 312 I
Terms to Learn 312 I Assignment Material 313 I
Questions 313 I Exercises 313 I Problems 317 I
Collaborative Learning Problem 323

9 Inventory Costing and Capacity Analysis 324

Intel's Inventory Strategy Backfires
Part One: Inventory Costing for Manufacturing
Companies

325

Variable Costing and Absorption Costing 325

Data for Stassen Company for 2009 326
Comparing Income Statements for One Year 327
Explaining Differences in Operating Income 329
Data for Stassen Company for 2009, 2010,
and 2011 329
Comparing Income Statements for Three Years 329
Effect of Sales and Production on Operating Income
under Variable Costing 332
Performance Measures and Absorption Costing 332
Undesirable Buildup of Inventories 333

CONTENTS 13

Proposals for Revising Performance Evaluation 334

Throughput Costing 335
Comparison of Alternative Inventory-Costing
Methods 335
Concepts in Action: Yield Improvements and the
Production-Volume Variance at Analog
Devices
Problem for Self-Study

338

Part Two: Denominator-level Capacity Concepts and

Fixed-Cost Capacity Analysis 339

Alternative Denominator-Level Capacity Concepts for
Absorption Costing 339
Theoretical Capacity and Practical Capacity 339
Normal Capacity Utilization and Master-Budget
Capacity Utilization 340
Effect on Budgeted Fixed Manufacturing Cost
Rate 340
Choosing a Capacity Level 341
Product Costing and Capacity Management 341
Pricing Decisions and the Downward Demand
Spiral 342
Performance Evaluation 343
External Reporting 344
Tax Requirements 346
Difficulties in Forecasting Chosen Denominator-Level
Concept 347
Capacity Costs and Denominator-Level Issues 347
Problem for Self-Study 348 I Decision Points 349

APPENDIX: Breakeven Points in Variable Costing and

Absorption Costing 350
Terms to Learn 351 I Assignment Material 351 I
Questions 351 I Exercises 352 I Problems 357 I
Collaborative Learning Problem 361

10 Determining How Costs Behave 362

Management Accountants at Boeing Embrace

Opportunities, Tackle Challenges

General Issues in Estimating Cost Functions 363
Basic Assumptions and Examples of Cost
Functions 363
Brief Review of Cost Classification 365
Cost Estimation 366
The Cause-and-Effect Criterion in Choosing Cost
Drivers 366
Cost Estimation Methods 368
Industrial Engineering Method 368
Conference Method 368
Account Analysis Method 369
Quantitative Analysis Method 369
Steps in Estimating a Cost Function Using Quantitative
Analysis 370
High-Low Method 372
Regression Analysis Method 374

Evaluating Cost Drivers of the Estimated Cost

Function 375
Cost Drivers and Activity-Based Costing 378
Nonlinearity and Cost Functions 378
Learning Curves and Nonlinear Cost Functions 379
Concepts in Action: Activity-Based Costing:
Identifying Cost and Revenue Drivers
Cumulative Average-Time,Learning Model 381
Incremental Unit-Time Learning Model 381
Setting Prices, Budgets, and Standards 382
Data Collection and Adjustment Issues 384
Problem for Self-Study 386 I Decision Points 388

APPENDIX: Regression Analysis

389

Terms to Learn 398 I Assignment Material 398 I

Questions 398 I Exercises 398 I Problems 404 I
Collaborative Learning Problem 410

11 Decision Making and Relevant Information

412

Relevant Costs, the Internet, and Delta Airlines

Information and the Decision Process 413
The Concept of Relevance 414
Relevant Costs and Relevant Revenues 414
Qualitative and Quantitative Relevant
Information 415
An Illustration of Relevance: Choosing Output
Levels 416
One-Time-Only Special Orders 416
Potential Problems in Relevant-Cost Analysis 418
Insourcing-versus-Outsourcing and Make-versus-Buy
Decisions 419
Outsourcing and Idle Facilities 419
Strategic and Qualitative Factors 421
Opportunity Costs and Outsourcing 422
The Opportunity-Cost Approach r 422
Concepts in Action: The Changing Benefits and
Costs of "Offshoring"
Carrying Costs of Inventory 425
Product-Mix Decisions with Capacity
Constraints 426
Customer Profitability, Activity-Based Costing, and
Relevant Costs 427
Relevant-Revenue and Relevant-Cost Analysis of
Dropping a Customer 428
Relevant-Revenue and Relevant-Cost Analysis of
Adding a Customer 429
Relevant-Revenue and Relevant-Cost Analysis of
Closing or Adding Branch Offices or
Segments 430
Irrelevance of Past Costs and Equipment-Replacement
Decisions 431
Decisions and Performance Evaluation 432
Problem for Self-Study 434 I Decision Points 435

APPENDIX: Linear Programming

436

14 D CONTENTS
Terms to Learn 439 I Assignment Material 440 I
Questions 440 I Exercises 440 I Problems 445 I
Collaborative Learning Problem 453

12 Pricing Decisions and Cost Management 454

Seeking Perfect Prices, CEO Tears Up the Rules
Major Influences on Pricing Decisions 455
Customers, Competitors, and Costs 455
Time Horizon of Pricing Decisions 456
Costing and Pricing for the Short Run 456
Relevant Costs for Short-Run Pricing
Decisions 456
Strategic and Other Factors in Short-Run Pricing 457
Costing and Pricing for the Long Run 457
Calculating Product Costs for Long-Run Pricing
Decisions 457
Alternative Long-Run Pricing Approaches 459
Target Costing for Target Pricing 460
Understanding Customers' Perceived Value 460
Doing Competitor Analysis 461
Implementing Target Pricing and Target
Costing 461
Value Engineering, Cost Incurrence, and Locked-In
Costs 462
Concepts in Action: Extreme Target Pricing and Cost

Management at IKEA
Value-Chain Analysis and Cross-Functional
Teams 464
Achieving the Target Cost per Unit for Provalue 465
Cost-Based (Cost-Pius) Pricing 467
Cost-Pius Target Rate of Return on Investment 467
Alternative Cost-Pius Methods 468
Cost-Pius Pricing and Target Pricing 469
Life-Cycle Product Budgeting and Costing 469
Life-Cycle Budgeting and Pricing Decisions 469
- Customer Life-Cycle Costing 471
Considerations Other than Costs in Pricing
Decisions 471
Effects of Antitrust Laws on Pricing 473
Problem for Self-Study 474 I Decision Points 476 I
Terms to Learn 477 I Assignment Material 477 I
Questions 477 I Exercises 478 I Problems 482 I
Collaborative Learning Problem 487

13 Strategy, Balanced Scorecard, and Strategic

Profitability Analysis 488
Balanced Scorecard Helps Bank Hit New Profitability High

What Is Strategy? 489

Building Internal Capabilities: Quality Improvement
and Reengineering at Chipset 491
Strategy Implementation and the Balanced
Scorecard 492
The Balanced Scorecard 492
Four Perspectives of the Balanced Scorecard 493
Implementing a Balanced Scorecard 495
Aligning the Balanced Scorecard to Strategy 497

Features of a Good Balanced Scorecard 497

Pitfalls in Implementing a Balanced Scorecard 498
Evaluating the Success of Strategy and
Implementation 499
Strategic Analysis of Operating Income 500
Growth Component of Change in Operating
Income 502
Price-Recovery Component of Change in Operating
Income 503
Productivity Component of Change in Operating
Income 504
Further Analysis of Growth, Price-Recovery, and
Productivity Components 505
Applying the Five-Step Decision-Making Framework to
Strategy 507
Downsizing and the Management of Capacity 507
Identifying Unused Capacity for Engineered and
Discretionary Overhead Costs 508
Concepts in Action: The Growth vs. Profitability
Choice at YouTube
Managing Unused Capacity 510
Problem for Self-Study 511 I Decision Points 515

APPENDIX: Productivity Measurement 515

Terms to Learn 518 I Assignment Material 518 I
Questions 518 I Exercises 519 I Problems 522 I
Collaborative Learning Problem
525

14 Cost Allocation, Customer-Profitability Analysis,

and Sales-Variance Analysis 526
Minding the Store: Analyzing Customers, Best Buy Decides

Not All Are Welcome

Purposes of Cost Allocation 527
Criteria to Guide Cost-Allocation Decisions 528
Cost Allocation and Costing Systems 530
Allocating Corporate Costs to Divisions and
Products 531
Implementing Corporate Cost Allocations 533
Customer Revenues and Customer Costs 534
Customer-Revenue Analysis 535
Customer-Cost Analysis 535
Customer-Level Costs 536
Customer-Profitability Profiles 538
Using the Five-Step Decision-Making Process to
Manage Customer Profitability 540
Concepts in Action: Customer Profitability at Verizon
Wireless
Sales Variances 541
Budget Data for June 2009 542
Actual Results for June 2009 542
Static-Budget Variance 542
Flexible-Budget Variance and Sales-Volume
Variance 543
Sales-Mix and Sales-Quantity Variances 543
Sales-Mix Variance 543
Sales-Quantity Variance 545

CONTENTS 15
Market-Share and Market-Size Variances 545
Market-Share Variance 545
Market-Size Variance 546
Problem for Self-Study 547 I Decision Points 549

APPENDIX: Mix and Yield Variances for Substitutable

Inputs 550
Terms to Learn 553 I Assignment Material 553 I
Questions 553 I Exercises 554 I Problems 558 I
Collaborative Learning Problem 564

15 Allocation of Support-Department Costs,

Common Costs, and Revenues 566
Is Hollywood Taking "Creative License" With Its Cost
Allocations?

Allocating Costs of a Support Department to Operating

Departments 567
Single-Rate and Dual-Rate Methods 568
Allocation Based on the Demand for (or Usage of)
Computer Services 568
Allocation Based on the Supply of Capacity 569
Budgeted Usage, Actual Usage, and Capacity-Level
Allocation Bases 571
Budgeted versus Actual Rates 572
Allocating Costs of Multiple Support Departments 572
Direct Method 573
Step-Down Method 574
Reciprocal Method 576
Overview of Methods 578
Allocating Common Costs 580
Stand-Alone Cost-Allocation Method 580
Incremental Cost-Allocation Method 580
Cost Allocations and Contracts 581
Contracting with the U.S. Government 581
Fairness of Pricing 582
Revenue Allocation and Bundled Products 582
Revenue-Allocation Methods 583
Stand-Alone Revenue-Allocation Method 583
Incremental Revenue-Allocation Method 584
Concepts in Action: Contract Disputes over
Reimbursable Costs for U.S. Government
Agencies

Other Revenue-Allocation Methods 586

Problem for Self-Study 587 I Decision Points 589 I
Terms to Learn 589 I Assignment Material 590 I
Questions 590 I Exercises 590 I Problems 594 I
Collaborative Learning Problem 597

16 Cost Allocation: Joint Products and

Byproducts 598
Medicare Dissects the Costs Allocated to Organ Donations
Joint-Cost Basics 599
Main Products, Joint Products, and Byproducts 600
Why Allocate Joint Costs? 601
Approaches to Allocating Joint Costs 601

Sales Value at Splitoff Method 602

Physical-Measure Method 603
Net Realizable Value (NRV) Method 604
Constant Gross-Margin Percentage NRV
Method 606
Choosing a Method 607
Not Allocating Joint Costs 608
Irrelevance of Joint Costs for Decision Making 608
Sell-or-Process-Further Decisions 609
Joint-Cost Allocation and Performance
Evaluation 609
Pricing Decisions 610
Accounting for Byproducts 610
Production Method: Byproducts Recognized at Time
Production Is Completed 611
Sales Method: Byproducts Recognized at Time of
Sale 612
Concepts in Action: Chicken Processing: Costing of
Joint Products and Byproducts
Problem for Self-Study 613 I Decision Points 616 I
Terms to Learn 617 I Assignment Material 617 I
Questions 617 I Exercises 617 I Problems 622 I
Collaborative Learning Problem 625

17 Process Costing 626

Faulty Accounting Forces Shell to Restate Its Earnings

Illustrating Process Costing 627

Case 1: Process Costing with Zero Beginning and Zero
Ending Work-in-Process Inventory 628
Case 2: Process Costing with Zero Beginning but Some
Ending Work-in-Process Inventory 629
Physical Units and Equivalent Units
(Steps 1 and 2) 630
Calculation of Product Costs (Steps 3,4, and 5) 631
Journal Entries 632
Case 3: Process Costing with Some Beginning and Some
Ending Work-in-Process Inventory 633
Weighted-Average Method 634
First-In, First-Out Method 636
Comparison of Weighted-Average and FIFO
Methods 640
Standard-Costing Method of Process Costing 641
Computations Under Standard Costing 641
Accounting for Variances 643
Transferred-In Costs in Process Costing 645
Transferred-In Costs and the Weighted-Average
Method 646
Transferred-In Costs and the FIFO Method 647
Points to Remember About Transferred-In Costs 649
Concepts in Action: Hybrid Costing for Customized
Shoes at Adidas
Hybrid Costing Systems 650
Problem for Self-Study 651 I Decision Points 652

APPENDIX: Operation Costing 653

16 D CONTENTS
Terms to Learn 656 I Assignment Material 656 I
Questions 656 I Exercises 656 I Problems 660 I
Collaborative Learning Problem 663

18 Spoilage, Rework, and Scrap ^664

Rework Delays Airbus

Terminology 665
Different Types of Spoilage 665
Normal Spoilage 666
Abnormal Spoilage 666
Process Costing and Spoilage 666
Count All Spoilage 667
Five-Step Procedure for Process Costing with
Spoilage 668
Weighted-Average Method and Spoilage 669
FIFO Method and Spoilage 669
Standard-Costing Method and Spoilage 672
;
Journal Entries 672
Inspection Points and Allocating Costs of
Normal Spoilage 674
Job Costing and Spoilage 674
Job Costing and Rework 676
Accounting for Scrap '677
Recognizing Scrap at the Time of Its Sale 677
Recognizing Scrap at the Time of Its
Production . 678
Concepts in Action: Managing Waste and
Environmental Costs at Toyota
Problem for Self-Study 680 I Decision Points 680

APPENDIX: Inspection and Spoilage at Various Stages

of Completion in Process Costing 681
Terms to Learn 683 I Assignment Material 683 I
Questions 683 I Exercises 683 I Problems 686 I
Collaborative Learning Problem 689

19 Balanced Scorecard: Quality, Time, and the

Theory of Constraints 690
JetBlue Plans Overhaul after Snafus Irk Customers

Part One: Quality as a Competitive Tool 691

The Financial Perspective: Costs of Quality 693
The Customer Perspective: Nonfinancial Measures of
Customer Satisfaction 695
The Internal-Business-Process Perspective: Analyzing
Quality Problems and Improving Quality 696
Control Charts 696
Pareto Diagrams 697
Cause-and-Effect Diagrams 697
Relevant Costs and Benefits of Evaluating Quality
Improvement 698
Nonfinancial Measures of Internal-Business-Process
Quality 700
The Learning-and-Growth Perspective for Quality
Improvements 700
Evaluating Quality Performance 700

Advantages of COQ Measures 700

Advantages of Nonfinancial Measures of
Quality 701

Part Two: Time as a Competitive Tool 701

Customer-Response Time and On-Time
Performance 701
Time Drivers and Costs of Time 702
Uncertainty and Bottlenecks as Drivers of Time 703
Concepts in Action: Overcoming Bottlenecks on the
Internet
Relevant Revenues and Costs of Time 705

Part Three: Theory of Constraints and ThroughputContribution Analysis 706

Managing Bottlenecks 707
Balanced Scorecard and Time-Related Measures 710
Problem for Self-Study 711 I Decision Points 712 I
Terms to Learn 713 I Assignment Material 713 I
Questions 713 I Exercises 713 I Problems 717 I
Collaborative Learning Problem 722

20 Inventory Management, Just-in-Time, and

Simplified Costing Methods 724
Best Buy and Chrysler Use New Technology to Proactively
Manage Their Inventories

Inventory Management in Retail Organizations 725

Costs Associated with Goods for Sale 725
Economic-Order-Quantity Decision Model 726
When to Order, Assuming Certainty 728
Safety Stock 729
Estimating Inventory-Related Relevant Costs and Their
Effects 731
Considerations in Obtaining Estimates of Relevant
Costs 731
Cost of a Prediction Error 731
Conflict Between the EOQ Decision Model and
Managers' Performance Evaluation 732
Just-in-Time Purchasing 732
JIT Purchasing and EOQ Model Parameters 733
Relevant Costs of JIT Purchasing 733
Supplier Evaluation and Relevant Costs of Quality
and Timely Deliveries 734
JIT Purchasing, Planning and Control, and
Supply-Chain Analysis 735
Inventory Management and MRP 736
Inventory Management and JIT Production 737
Financial Benefits of JIT and Relevant Costs 737
Concepts in Action: After the Encore: Just-in-Time
Live Concert CDs
JIT in Service Industries 738
Enterprise Resource Planning (ERP) Systems 739
Performance Measures and Control in JIT
Production 740
Effect of JIT Systems on Product Costing 740
Backflush Costing 740
Simplified Normal or Standard Costing 741

CONTENTS 17

Accounting for Variances 743

Special Considerations in Backflush Costing 746
Lean Accounting 747
Problems for Self-Study 748 I Decision Points 749 I
Terms to Learn 750 I Assignment Material 750 I
Questions 750 I Exercises 751 I Problems 753 I
Collaborative Learning Problem 757

21 Capital Budgeting and Cost Analysis 758

Chevron Pumps Up Its Capital Budget

Two Dimensions of Cost Analysis 759

Stages of Capital Budgeting 760
Discounted Cash Flow 761
Net Present Value Method 762
Internal Rate-of-Return Method 763
Comparison of Net Present Value and Internal
Rate-of-Return Methods 765
Sensitivity Analysis 765
Payback Method 766
Uniform Cash Flows 766
Nonuniform Cash Flows 767
Accrual Accounting Rate-of-Return Method 768
Evaluating Managers and Goal-Congruence
Issues 769
Relevant Cash Flows in Discounted Cash Flow
Analysis 770
Relevant After-Tax Flows 770
Categories of Cash Flows 771
Managing the Project 776
Strategic Considerations in Capital Budgeting 776
Concepts in Action: Globalizing Capital Budgeting at
AES Corporation

Customer Value and Capital Budgeting 778

Investment in Research and Development 778

Problem for Self-Study 778 I Decision Points 781

APPENDIX: Capital Budgeting and Inflation

782

Terms to Learn 784 I Assignment Material 784 I

Questions 784 I Exercises 785 I Problems 789 I
Collaborative Learning Problem 792 I Answers to
Exercises in Compound Interest (Exercise 21-16) 792

22 Management Control Systems, Transfer Pricing,

and Multinational Considerations 794
Transfer Pricing Leads Symantec to $1 Billion Dispute with
the IRS

Management Control Systems 795

Evaluating Management Control Systems 796
Organization Structure and Decentralization 797
Benefits of Decentralization 797
Costs of Decentralization 798
Comparison of Benefits and Costs 798
Decentralization in Multinational Companies 799
Choices About Responsibility Centers 799
Transfer Pricing 799
An Illustration of Transfer Pricing 801

Market-Based Transfer Prices 802

Perfectly-Competitive-Market Case 803
Distress Prices 804
Cost-Based Transfer Prices 804
Full-Cost Bases 805
Variable-Cost Bases 806
Prorating the Difference Between Maximum and
Minimum Transfer Prices 807
Dual Pricing 807
Negotiated Transfer Prices 808
A General Guideline for Transfer-Pricing
Situations 808
Multinational Transfer Pricing and Tax
Considerations 810
Concepts in Action: U.S. Internal Revenue Service,
Japanese National Tax Agency, and TransferPricing Disputes
Problem for Self-Study 813 I Decision Points 815 I
Terms to Learn 816 I Assignment Material 816 I
Questions 816 I Exercises 816 I Problems 819 I
Collaborative Learning Problem 823

23 Performance Measurement, Compensation, and

Multinational Considerations 824
Retooling CEO Compensation at Home Depot
Financial and Nonfinancial Performance

Measures 825
Choosing Among Different Performance Measures:
Step 1 826
Return on Investment 827
Residual Income 829
Economic Value Added 830
Return on Sales 831
Comparing Performance Measures 831
Choosing the Time Horizon of the Performance
Measures: Step 2 832
Choosing Alternative Definitions for Performance
Measures: Step 3 833
Choosing Measurement Alternatives for Performance
Measures: Step 4 833
Current Cost 833
Long-Term Assets: Gross or Net Book Value? 834
Choosing Target Levels of Performance: Step 5 836
Choosing the Timing of Feedback: Step 6 836
Performance Measurement in Multinational
Companies 837
Calculating the Foreign Division's ROI in the Foreign
Currency 837
Calculating the Foreign Division's ROI in U.S.
Dollars 838
Distinction Between Managers and Organization
Units 839
The Basic Trade-Off: Creating Incentives versus
Imposing Risk 839
Intensity of Incentives and Financial and
Nonfinancial Measurements 840

18 CONTENTS

Benchmarks and Relative Performance

Evaluation 841
Performance Measures at the Individual Activity
Level 841
Performing Multiple Tasks 841
Team-Based Compensation Arrangements 842
Executive Performance Measures and

Questions 848 / Exercises 849 / Problems 853 /

Collaborative Learning Problem 856

Appendix A 858
Appendix B 862
Appendix C 869

Compensation 842
Strategy and Levers of Control 843
Concepts in Action: CEO Compensation and
Company Performance

Glossary 873

Problems for Self-Study 846 I Decision Points 847 I

Terms to Learn 848 I Assignment Material 848 I

Subject Index 888

Author Index 884

Company Index 886