## Cost Management: A Strategic Emphasis, Eighth Edition

By Edward J. Blocher, David E. Stout, Paul E. Juras and Steven D. Smith

**Contents**

Walkthrough viii

PART ONE

INTRODUCTION TO STRATEGY, COST

MANAGEMENT, AND COST SYSTEMS 1

Chapter 1 Cost Management and Strategy 2

Management Accounting and the Role of Cost Management 3

The Four Functions of Management 5

Strategic Management and the Strategic Emphasis in Cost

Management 6

Types of Organizations 6

The Contemporary Business Environment 8

The Global Business Environment 8

Lean Manufacturing 8

Use of Information Technology, the Internet, and Enterprise

Resource Management 9

Focus on the Customer 9

Management Organization 9

Social, Political, and Cultural Considerations 10

The Strategic Focus of Cost Management 10

Contemporary Management Techniques: The Management

Accountant’s Response to the Contemporary Business

Environment 12

The Balanced Scorecard (BSC) and Strategy Map 12

The Value Chain 13

Activity-Based Costing and Management 13

Business Analytics 13

Target Costing 14

Life-Cycle Costing 14

Benchmarking 14

Business Process Improvement 14

Total Quality Management 15

Lean Accounting 15

The Theory of Constraints 15

Sustainability 15

Enterprise Risk Management 15

How a Firm Succeeds: The Competitive Strategy 16

Developing a Competitive Strategy 17

Cost Leadership 17

Differentiation 17

Other Strategic Issues 18

The Five Steps of Strategic Decision Making 19

The Professional Environment of Cost Management 20

Professional Organizations 20

Professional Certifications 22

Professional Ethics 22

Summary 24

Key Terms 25

Comments on Cost Management in Action 25

Self-Study Problem 26

Questions 26

Brief Exercises 27

Exercises 29

Problems 31

Solution to Self-Study Problem 36

Chapter 2 Implementing Strategy: The

Value Chain, the Balanced Scorecard, and

the Strategy Map 37

Strengths-Weaknesses-Opportunities-Threats (SWOT)

Analysis 38

Execution 40

Value-Chain Analysis 42

Value-Chain Analysis in Computer Manufacturing 44

The Five Steps of Strategic Decision Making for CIC

Manufacturing 44

The Balanced Scorecard, Strategy Map, and

Sustainability 45

The Balanced Scorecard (BSC) 46

The Strategy Map 48

Expanding the Balanced Scorecard and Strategy Map:

Sustainability 50

Summary 54

Key Terms 54

Comments on Cost Management in Action 54

Self-Study Problems 54

Questions 55

Brief Exercises 56

Exercises 57

Problems 59

Solutions to Self-Study Problems 69

Chapter 3 Basic Cost Management Concepts 71

Costs, Cost Drivers, Cost Objects, and Cost Assignment 72

Cost Assignment and Cost Allocation: Direct and Indirect Costs 73

Cost Drivers and Cost Behavior 75

Activity-Based Cost Drivers 76

Volume-Based Cost Drivers 76

Structural and Executional Cost Drivers 80

The Five Steps of Strategic Decision Making for

Procter & Gamble 83

Cost Concepts for Product and Service Costing 83

Product Costs and Period Costs 83

Manufacturing and Merchandising Costing 84

Attributes of Cost Information 88

Periodic and Perpetual Inventory Systems 88

Summary 88

Key Terms 89

Comments on Cost Management in Action 89

Self-Study Problem 90

Questions 90

Brief Exercises 90

Exercises 91

Problems 98

Solution to Self-Study Problem 101

Chapter 4 Job Costing 103

Costing Systems 104

Cost Accumulation: Job or Process Costing? 104

Cost Measurement: Actual, Normal, or Standard

Costing? 105

Overhead Application under Normal Costing: Volume-Based or

Activity-Based? 105

The Strategic Role of Costing 106

Job Costing: The Cost Flows 106

Direct and Indirect Materials Costs 107

Direct and Indirect Labor Costs 108

Factory Overhead Costs 109

The Application of Factory Overhead in Normal

Costing 110

Cost Drivers for Factory Overhead Application 110

Applying Factory Overhead Costs 111

Departmental Overhead Rates 112

Disposition of Underapplied and Overapplied Overhead 112

Potential Errors in Overhead Application 113

Job Costing in Service Industries; Project Costing 114

Operation Costing 116

Summary 118

Appendix: Spoilage, Rework, and Scrap in Job

Costing 118

Key Terms 120

Comments on Cost Management in Action 120

Self-Study Problem 120

Questions 121

Brief Exercises 122

Exercises 123

Problems 126

Solution to Self-Study Problem 134

Chapter 5 Activity-Based Costing and Customer

Profitability Analysis 136

The Strategic Role of Activity-Based Costing 137

Role of Volume-Based Costing 138

Activity-Based Costing 138

Resources, Activities, Resource Consumption Cost Drivers, and

Activity Consumption Cost Drivers 138

What Is Activity-Based Costing? 139

The Two-Stage Cost Assignment Procedure 139

Steps in Developing an Activity-Based Costing System 141

Step 1: Identify Resource Costs and Activities 141

Step 2: Assign Resource Costs to Activities 142

Step 3: Assign Activity Costs to Cost Objects 142

Benefits of Activity-Based Costing 142

A Comparison of Volume-Based and Activity-Based

Costing 143

Volume-Based Costing 143

Activity-Based Costing 144

The Five Steps of Strategic Decision Making for Haymarket

BioTech Inc. 146

Calculating the Cost of Idle Capacity in ABC 146

Activity-Based Management 148

What Is Activity-Based Management? 148

Activity Analysis 149

Value-Added Analysis 149

Real-World Activity-Based Costing/Management

Applications 150

Customer Profitability Analysis 151

Customer Cost Analysis 152

Customer Profitability Analysis 154

Customer Lifetime Value 155

Implementation Issues and Extensions 156

Multistage Activity-Based Costing 157

Resource Consumption Accounting (RCA) 157

Time-Driven Activity-Based Costing (TDABC) 158

Summary 160

Key Terms 160

Comments on Cost Management in Action 160

Self-Study Problem 161

Questions 161

Brief Exercises 162

Exercises 162

Problems 168

Solution to Self-Study Problem 177

Chapter 6 Process Costing 179

Characteristics of Process Costing Systems 180

Equivalent Units 180

Flow of Costs in Process Costing 182

Steps in Process Costing (The Production Cost Report) 183

Process Costing Methods 184

Illustration of Process Costing 184

Weighted-Average Method 184

First-In, First-Out (FIFO) Method 188

Comparison of Weighted-Average and FIFO Methods 193

Process Costing with Multiple Departments 195

Transferred-in Costs 195

Weighted-Average Method 195

The FIFO Method 197

Journal Entries for Process Costing 200

Implementation and Enhancement of Process Costing 200

Activity-Based Costing and the Theory of Constraints 200

Just-in-Time Systems and Backflush Costing 201

Normal and Standard Process Costing 202

Summary 203

Appendix: Spoilage in Process Costing 204

Key Terms 207

Comments on Cost Management in Action 207

Self-Study Problems 207

Questions 208

Brief Exercises 208

Exercises 209

Problems 212

Solutions to Self-Study Problems 220

Chapter 7 Cost Allocation: Departments, Joint

Products, and By-Products 225

The Strategic Role and Objectives of Cost Allocation 226

The Ethical Issues of Cost Allocation 227

Cost Allocation to Service and Production Departments 228

First Phase: Trace Direct Costs and Allocate Indirect Costs

to All Departments 230

Allocation in Second and Third Phases 230

Implementation Issues 236

Cost Allocation in Service Industries 241

Joint Product Costing 243

Methods for Allocating Joint Costs to Joint Products 244

Summary 249

Appendix: By-Product Costing 249

Key Terms 252

Comments on Cost Management in Action 252

Self-Study Problem 253

Questions 253

Brief Exercises 253

Exercises 254

Problems 258

Solution to Self-Study Problem 266

PART TWO

PLANNING AND DECISION MAKING 267

Chapter 8 Cost Estimation 268

Strategic Role of Cost Estimation 269

Using Cost Estimation to Predict Future Costs 269

Using Cost Estimation to Identify Cost Drivers 270

Six Steps of Cost Estimation 270

Step 1: Define the Cost Object 270

Step 2: Determine the Cost Drivers 270

Step 3: Collect Consistent and Accurate Data 271

Step 4: Graph the Data 271

Step 5: Select and Employ the Estimation Method 271

Step 6: Assess the Accuracy of the Cost Estimate 271

Cost Estimation Methods 272

An Illustration of Cost Estimation 272

High-Low Method 272

Regression Analysis 274

An Example: Using Regression to Estimate Maintenance

Costs 279

A Second Example: Using Excel for Regression Analysis 281

Illustration of the Use of Regression Analysis in the Gaming

Industry 282

The Five Steps of Strategic Decision Making for Harrah’s 282

Time-Series and Cross-Sectional Regression 283

Implementation Problems: Nonlinearity 283

Summary 284

Appendix: Learning Curve Analysis 284

Regression Analysis Supplement (available online only

in Connect) 288

Key Terms 288

Comments on Cost Management in Action 288

Self-Study Problems 289

Questions 291

Brief Exercises 292

Exercises 293

Problems 299

Solutions to Self-Study Problems 310

Chapter 9 Short-Term Profit Planning:

Cost-Volume-Profit (CVP) Analysis 314

Cost-Volume-Profit Analysis 315

Contribution Margin and Contribution Income Statement 316

Strategic Role of CVP Analysis 317

CVP Analysis for Breakeven Planning 318

Breakeven in Units, Q 318

Breakeven in Dollars 319

Short-Cut Formulas 320

CVP Graph and the Profit-Volume Graph 320

CVP Analysis for Profit Planning 321

Revenue Planning 321

Cost Planning 322

Including Income Taxes in CVP Analysis 324

CVP Analysis for Activity-Based Costing 326

Dealing with Uncertainty 328

What-If Analysis 328

Decision Tables/Decision Trees/Expected Value Analysis 329

Margin of Safety (MOS) 329

Operating Leverage 330

The Five Steps of Strategic Decision Making for CVP

Analysis 331

CVP Analysis with Two or More Products/Services 334

Multiproduct Profit Planning Using the Weighted-Average

Contribution

Margin Ratio 334

Multiproduct Profit Planning Using the Weighted-Average

Contribution

Margin per Unit 335

Multiproduct Profit Planning Using the Sales Basket

Approach 336

Value Stream Accounting and CVP Analysis 336

CVP Analysis for Not-for-Profit Organizations 336

Assumptions and Limitations of Conventional CVP

Analysis 337

Linearity, the Relevant Range, and Step Costs 337

Summary 338

Key Terms 338

Comments on Cost Management in Action 338

Self-Study Problem 339

Questions 339

Brief Exercises 339

Exercises 340

Problems 345

Solution to Self-Study Problem 354

Chapter 10 Strategy and the Master Budget 355

Role of Budgets 356

Strategy and the Master Budget 357

Importance of Strategy in Budgeting 357

Strategic Goals and Long-Term Objectives 357

Short-Term Objectives and the Master Budget 358

The Budgeting Process 358

Budget Committee 359

Budget Period 359

Budget Guidelines 359

Negotiation, Review, and Approval 359

Revision 359

Comprehensive Budgeting Example: Kerry Window

Systems Inc. 359

The Five Steps of Strategic Decision Making for

Kerry Window Systems Inc. 360

Master Budget 360

Sales Budget 360

Manufacturing Budgets 362

Merchandise Purchases Budget 367

Selling and Administrative Expense Budget 367

Cash Receipts (Collections) Budget 367

Cash Budget 369

Budgeted Income Statement 371

Budgeted Balance Sheet 372

Uncertainty and the Budgeting Process 373

What-If Analysis 374

Sensitivity Analysis 374

Scenario Analysis 375

Budgeting in Service Companies 376

Budgeting in Service Industries 376

Alternative Budgeting Approaches 378

Zero-Base Budgeting 378

Activity-Based Budgeting 378

Time-Driven Activity-Based Budgeting 380

Kaizen (Continuous-Improvement) Budgeting 381

Behavioral Issues in Budgeting 381

Budgetary Slack 381

Goal Congruence 382

Authoritative or Participative Budgeting? 382

Difficulty Level of the Budget Target 382

Linkage of Compensation and Budgeted Performance 383

Summary 385

Key Terms 386

Comments on Cost Management in Action 386

Self-Study Problems 386

Questions 388

Brief Exercises 388

Exercises 389

Problems 400

Solutions to Self-Study Problems 408

Chapter 11 Decision Making with a Strategic

Emphasis 411

The Five Steps of the Decision-Making Process 412

Relevant Cost Analysis 413

Relevant Cost Information 413

Batch-Level Cost Drivers 415

Depreciation Expense: Relevant or Not? 417

Other Relevant Information 417

Strategic Analysis 417

Special-Order Decisions 418

Relevant Cost Analysis 418

Strategic Analysis 420

Is TTS Operating at Full Capacity? 420

Excessive Relevant Cost Pricing 421

Other Important Strategic Factors 421

Value Stream Accounting and the Special-Order

Decision 421

Make-vs.-Buy and Lease-vs.-Buy Decisions 422

Relevant Cost Analysis 422

Make-vs.-Buy Decision 422

Lease-vs.-Purchase (Buy) Decision 422

Strategic Analysis 424

Decisions to Sell before or after Additional

Processing 424

Relevant Cost Analysis 424

Strategic Analysis 426

Product- (or Service-) Line Profitability Analysis: Keep

or Drop a Product (or Service) Line 426

Relevant Cost Analysis 426

Strategic Analysis 428

Profitability Analysis: Service Offerings of Not-for-Profit

Organizations 428

Relevant Cost Analysis 428

Strategic Analysis 429

Constrained Optimization Analysis: Short-Term

Product-Mix Decisions 429

Case 1: One Production Constraint 430

Case 2: Two or More Production Constraints 431

Behavioral and Implementation Issues 433

Consideration of Strategic Objectives 433

Predatory Pricing Practices 433

Replacement of Variable Costs with Fixed Costs 433

Proper Identification of Relevant Factors 434

Summary 434

Appendix: Linear Programming and the Product-Mix

Decision 435

Key Terms 438

Comments on Cost Management in Action 438

Self-Study Problems 438

Questions 439

Brief Exercises 440

Exercises 440

Problems 446

Solutions to Self-Study Problems 458

Chapter 12 Strategy and the Analysis of Capital

Investments 460

Strategy and the Analysis of Capital Expenditures 462

Underlying Nature of Capital Expenditures 462

Recent Developments: Foreign Capital Investment in the United

States and Economic Protectionism 462

Strategic Analysis 462

Chapter Overview—Where Are We Headed? 463

The Role of Accounting in the Capital Budgeting

Process 463

Linkage to the Master Budget 463

Linkage to Strategy and the Balanced Scorecard 463

Generation of Relevant Financial Data for Decision-Making

Purposes 465

Conducting Post-Audits 465

The Five Steps of Strategic Decision Making: Cost-Benefit

Analysis of a Proposed Hospital Bar-Code Technology

Investment 465

Identification of Relevant Cash Flow Data for Capital

Expenditure Analysis 466

Why Focus on Cash Flows and the Timing of These Cash

Flows? 466

Cash Flows—A Framework for Analysis 466

Sample Data Set: Mendoza Company—Equipment-Purchase

Decision 467

Determining After-Tax Cash Flows for Capital Investment

Analysis 468

Recap—After-Tax Cash Flow Information for the Mendoza

Company Investment Proposal 473

Discounted Cash Flow Capital Budgeting Decision

Models 473

Types of Capital Budgeting Decision Models 473

DCF Models: Specifying the Discount Rate 473

Estimating the WACC 474

Net Present Value Decision Model 476

Internal Rate of Return Decision Model 478

The Modified Internal Rate of Return 479

Comparison of NPV and IRR Methods: Which to Use? 480

Structuring an Asset-Replacement Decision Problem 480

Uncertainty and the Capital Budgeting Process 482

Sensitivity Analysis 482

Real Options 485

Other Capital Budgeting Decision Models 489

Payback Period 489

Accounting (Book) Rate of Return 491

Behavioral Issues in Capital Budgeting 493

Common Behavioral Problems: Cost Escalation, Incrementalism,

and Uncertainty Intolerance 493

Goal-Congruency Issues 493

Addressing the Goal-Congruency Problem 494

Summary 495

Appendix A: Spreadsheet Templates for Conducting a

DCF Analysis of an Asset-Replacement Decision 497

Appendix B: DCF Models: Some Advanced

Considerations 499

Appendix C: Present Value Tables 502

Key Terms 504

Comments on Cost Management in Action 504

Self-Study Problem 504

Questions 506

Brief Exercises 506

Exercises 507

Problems 515

Solution to Self-Study Problem 523

Chapter 13 Cost Planning for the Product Life

Cycle: Target Costing, Theory of Constraints,

and Strategic Pricing 527

Target Costing 529

Value Engineering 531

Target Costing and Kaizen 534

An Illustration: Target Costing in Health Product

Manufacturing 534

An Illustration Using Quality Function Deployment 535

Benefits of Target Costing 537

The Theory of Constraints 537

The Use of the Theory of Constraints in Health Product

Manufacturing 539

Steps in the Theory of Constraints Analysis 539

The Five Steps of Strategic Decision Making for Speed and

Efficiency in the Fashion Industry 543

Theory of Constraints Reports 544

Activity-Based Costing and the Theory of Constraints 545

Life-Cycle Costing 545

The Importance of Design 546

Strategic Pricing Using the Product Life Cycle 547

Pricing Using the Cost Life Cycle 547

Strategic Pricing for Phases of the Sales Life Cycle 550

Strategic Pricing: Analytical and Peak Pricing Methods 550

Summary 551

Appendix: Using the Flow Diagram to Identify

Constraints 551

Key Terms 552

Comments on Cost Management in Action 552

Self-Study Problem 553

Questions 554

Brief Exercises 554

Exercises 554

Problems 559

Solution to Self-Study Problem 568

PART THREE

OPERATIONAL-LEVEL CONTROL 569

Chapter 14 Operational Performance

Measurement: Sales, Direct Cost Variances,

and the Role of Nonfinancial Performance

Measures 570

The Schmidt Machinery Company 571

Management Accounting and Control Systems 572

Developing an Operational Control System: The Five Steps of

Strategic Decision Making for Schmidt Machinery 573

Short-Term Financial Control 573

Flexible Budgets and Profit-Variance Analysis 574

The Flexible Budget 574

Sales Volume Variance and the Flexible-Budget

Variances 576

Further Analysis of the Direct Materials Flexible-Budget

Variance 582

Standard Costs 587

Standard Costs vs. a Standard Cost System 587

Types of Standards 588

Standard-Setting Procedures 589

Establishing Standard Costs 589

Standard Cost Sheet 590

Recording Cost Flows and Variances in a Standard Cost

System 591

Direct Materials Cost 591

Direct Labor Cost 593

Application of Standard Factory Overhead Costs 593

Completion of Production 594

The Strategic Role of Nonfinancial Performance

Indicators 595

Limitations of Short-Term Financial Control 595

Business Processes 595

Operating Processes 596

Just-in-Time Manufacturing 596

Summary 599

Key Terms 601

Comments on Cost Management in Action 601

Self-Study Problems 602

Questions 603

Brief Exercises 603

Exercises 604

Problems 611

Solutions to Self-Study Problems 617

Chapter 15 Operational Performance

Measurement: Indirect Cost Variances and

Resource-Capacity Management 621

Standard Overhead Costs: Planning vs. Control 623

Variance Analysis for Factory (Manufacturing) Overhead

Costs 625

Variable Overhead Cost Analysis 625

Interpretation and Implications of Variable Overhead

Variances 626

Variable Overhead Efficiency Variance 627

Fixed Overhead Cost Analysis 628

Interpretation of Fixed Overhead Variances 631

Alternative Analyses of Overhead Variances 632

Summary of Overhead Variances 634

Supplementing Financial Results with Nonfinancial

Performance

Indicators 635

Recording Standard Overhead Costs 636

Journal Entries and Variances for Overhead Costs 636

End-of-Period Disposition of Variances 637

Variance Disposition 637

The Effects of Denominator-Level Choice on Absorption

Costing

Income 640

Standard Costs in Service Organizations 640

Overhead Cost Variances in Traditional ABC Systems 642

ABC-Based Flexible Budgets for Control 642

Flexible-Budget Analysis under Traditional (i.e., Non-Time-

Driven) ABC When There Is a Standard Batch Size for

Production

Activity 644

Extension of ABC Analysis: GPK and RCA 645

Investigation of Variances 646

Causes and Controllability 646

Role of Control Charts 647

Summary 647

Key Terms 650

Comments on Cost Management in Action 650

Self-Study Problem 650

Questions 651

Brief Exercises 652

Exercises 653

Problems 658

Solution to Self-Study Problem 668

Chapter 16 Operational Performance

Measurement: Further Analysis of Productivity

and Sales 671

The Strategic Role of the Flexible Budget in Analyzing

Productivity and Sales 672

Analyzing Productivity 673

Partial Productivity 676

Total Productivity 680

Analyzing Sales: Comparison with the Master

Budget 682

Sales Volume Variance Partitioned into Sales Quantity and

Sales Mix Variances 683

Sales Quantity Variance Partitioned into Market Size and

Market

Share Variances 686

The Five Steps of Strategic Decision Making for Schmidt

Machinery 690

Analyzing Sales: Comparison with Prior Period

Results 691

Analysis of Selling Price and Volume Variances 691

Analysis of Mix and Quantity Variances 693

Analysis of Variable Cost Variances 693

Summary 694

Key Terms 695

Comments on Cost Management in Action 695

Self-Study Problems 695

Questions 696

Brief Exercises 697

Exercises 697

Problems 701

Solutions to Self-Study Problems 708

Chapter 17 The Management and Control

of Quality 713

The Strategic Importance of Quality 715

Baldrige Quality Award 715

ISO 9000 and ISO 14000 716

Quality and Profitability: Conceptual Linkage 716

Accounting’s Role in the Management and Control of

Quality 717

The Five Steps of Strategic Decision Making: Improving

Quality in Pharmaceutical and Medical-Product

Companies 718

Comprehensive Framework for Managing and Controlling

Quality 719

The Meaning of Quality 719

Knowledge of Business Processes 719

Role of the Customer 719

Financial Component 721

Nonfinancial Performance Indicators 721

Feedback Loops 721

Relevant Cost Analysis of Quality-Related Spending and

Investments 721

Link to Operations Management and Statistics 721

Breadth of the System 721

Alternative Approaches to Setting Quality-Related

Expectations 722

Setting Quality Expectations: A Six Sigma Approach 722

Setting Quality Expectations: Goalpost vs. Absolute Conformance

Standards 723

Taguchi Quality Loss Function (QLF) 726

Financial Measures and Cost of Quality 729

Relevant Cost Analysis: Decision Making 729

Cost-of-Quality (COQ) Reporting 730

COQ Reports 734

Cost of Quality (COQ) and Activity-Based Costing 736

Nonfinancial Quality Indicators 736

Internal Nonfinancial Quality Metrics 736

External (Customer-Satisfaction) Quality Metrics 737

Role of Nonfinancial Performance Measures 739

Detecting and Correcting Poor Quality 739

Detecting Poor Quality 740

Taking Corrective Action 742

Lean Manufacturing and Accounting for “Lean” 745

Accounting for Lean 747

The Strategic Role of Lean Accounting 748

Summary 749

Key Terms 750

Comments on Cost Management in Action 750

Self-Study Problems 751

Questions 751

Brief Exercises 752

Exercises 755

Problems 765

Solutions to Self-Study Problems 773

PART FOUR

MANAGEMENT-LEVEL CONTROL 775

Chapter 18 Strategic Performance

Measurement: Cost Centers, Profit Centers, and

the Balanced Scorecard 776

Performance Measurement and Control 777

Operational Control vs. Management Control 778

Objectives of Management Control 778

Employment Contracts 779

Design of Management Control Systems for Motivation and

Evaluation 781

Informal Control Systems 782

Formal Control Systems 782

Strategic Performance Measurement 783

Decentralization 783

Types of Strategic Business Units 784

The Balanced Scorecard 785

Cost Centers 785

Strategic Issues Related to Implementing Cost Centers 785

Implementing Cost Centers in Departments 786

Outsourcing or Consolidating Cost Centers 788

Cost Allocation 788

Revenue Centers 789

Profit Centers 790

Strategic Role of Profit Centers 790

The Contribution Income Statement 792

Strategic Performance Measurement and the Balanced

Scorecard 797

Implementing the Balanced Scorecard and the Strategy Map for

Performance Evaluation 797

Implementing Strategy Using the Balanced Scorecard 798

Management Control in Service Firms and Not-for-Profit

Organizations 799

Summary 800

Key Terms 800

Comments on Cost Management in Action 800

Self-Study Problem 801

Questions 802

Brief Exercises 802

Exercises 804

Problems 813

Solution to Self-Study Problem 825

Chapter 19 Strategic Performance Measurement:

Investment Centers and Transfer Pricing 826

Five Steps in the Evaluation of the Financial Performance of Investment Centers in an Organization 827

Part One: Financial Performance Indicators for

Investment Centers 829

Return on Investment 829

Return on Investment Equals Return on Sales Times Asset Turnover

(ROI = ROS × AT) 829

Illustration of Short-Term Financial Performance Evaluation Using ROI 830

Return on Investment: Measurement Issues 832

Strategic Issues Regarding the Use of ROI 835

Residual Income 838

Time Period of Analysis: Single vs. Multiperiod

Perspective 839

Limitations of Residual Income 839

Economic Value Added 840

Estimating EVA® 841

Alternative Approaches to Estimating EVA® NOPAT and EVA®

Capital 842

Using Average Total Assets 843

Part Two: Transfer Pricing 843

When Is Transfer Pricing Important? 844

Objectives of Transfer Pricing 844

Transfer Pricing Methods 845

Choosing the Right Transfer Pricing Method: The Firmwide

Perspective 845

General Transfer Pricing Rule 849

International Issues in Transfer Pricing 850

Income Tax Planning Opportunities: International Transfer

Pricing 850

Other International Considerations 852

Advance Pricing Agreements 853

Summary 853

Key Terms 853

Comments on Cost Management in Action 854

Self-Study Problem 854

Questions 855

Brief Exercises 855

Exercises 856

Problems 860

Solutions to Self-Study Problems 870

Chapter 20 Management Compensation,

Business Analysis, and Business Valuation 871

Part One: The Strategic Role of Management

Compensation 872

Types of Management Compensation 872

Strategic Role and Objectives of Management

Compensation 873

Designing Compensation for Existing Strategic

Conditions 873

Risk Aversion and Management Compensation 874

Ethical Issues 874

Objectives of Management Compensation 874

Bonus Plans 876

Bases for Bonus Compensation 876

Bonus Compensation Pools 877

Bonus Payment Options 878

Tax Planning and Financial Reporting 879

Management Compensation in Service Firms 881

Part Two: Business Analysis and Business

Valuation 882

Business Analysis 882

The Balanced Scorecard 883

Financial Ratio Analysis 884

Business Valuation 885

The Discounted Cash Flow Method 886

Multiples-Based Valuation 888

Enterprise Value 889

An Illustration of the Five Steps of Strategic Decision Making

in the Valuation of a **Fashion Retailer** 889

Summary 890

Key Terms 890

Comments on Cost Management in Action 890

Self-Study Problems 891

Questions 892

Brief Exercises 892

Exercises 893

Problems 899

Solution to Self-Study Problems 908

Glossary 910

Index 921