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