## Horngren’s Cost Accounting: A Managerial Emphasis, Seventeenth Edition

By Srikant M Datar and Madhav V Rajan

**Contents:**

1 The Manager and Management Accounting 19

For Coca-Cola, Smaller Sizes Mean Bigger Profits 19

Financial Accounting, Management Accounting, and Cost Accounting 20

Strategic Decisions and the Management Accountant 22

Value-Chain and Supply-Chain Analysis and Key Success Factors 22

Value-Chain Analysis 23

Supply-Chain Analysis 24

Key Success Factors 25

Concepts in Action: Cost Leadership at Costco: Rock-Bottom Prices and Sky-High Profits 26

Decision Making, Planning, and Control: The Five-Step **Decision Making Process** 27

Key Management Accounting Guidelines 30

Cost–Benefit Approach 30

Behavioral and Technical Considerations 31

Different Costs for Different Purposes 31

Organization Structure and the Management Accountant 31

Line and Staff Relationships 31

The Chief Financial Officer and the Controller 32

Management Accounting Beyond the Numbers 33

Professional Ethics 34

Institutional Support 34

Typical Ethical Challenges 35

Problem for Self-Study 37 | Decision Points 37 |

Terms to Learn 38 | Assignment Material 38 |

Questions 38 | Multiple-Choice Questions 39 |

Exercises 39 | Problems 41

2 An Introduction to Cost Terms and Purposes 46

High Fixed Costs Bankrupt Aéropostale 46

Costs and Cost Terminology 47

Direct Costs and Indirect Costs 47

Cost Allocation Challenges 48

Factors Affecting Direct/Indirect Cost Classifications 49

Cost-Behavior Patterns: Variable Costs and Fixed Costs 50

Concepts in Action: Lyft Helps Hospitals Reduce Their Fixed Transportation Costs 52

Cost Drivers 53

Relevant Range 53

Relationships Between Types of Costs 54

Total Costs and Unit Costs 55

Unit Costs 55

Use Unit Costs Cautiously 55

Business Sectors, Types of Inventory, Inventoriable

Costs, and Period Costs 56

Manufacturing-, Merchandising-, and

Service-Sector Companies 56

Types of Inventory 57

Commonly Used Classifications of Manufacturing Costs 57

Inventoriable Costs 57

Period Costs 58

Illustrating the Flow of Inventoriable Costs and Period Costs 59

Manufacturing-Sector Example 59

Recap of Inventoriable Costs and Period Costs 63

Prime Costs and Conversion Costs 64

Measuring Costs Requires Judgment 64

Labor Costs 64

Benefits of Defining Accounting Terms 65

Different Meanings of Product Costs 65

A Framework for Cost Accounting and Cost Management 67

Calculating the Cost of Products, Services, and Other Cost Objects 67

Obtaining Information for Planning and Control and Performance Evaluation 67

Analyzing the Relevant Information for Making Decisions 67

Problem for Self-Study 68 | Decision Points 70 |

Terms to Learn 71 | Assignment Material 71 |

Questions 71 | Multiple-Choice Questions 72 |

Exercises 73 | Problems 78

3 Cost–Volume–Profit Analysis 83

How Coachella Tunes Up the Sweet Sound of Profits 83

Essentials of CVP Analysis 84

Contribution Margin 85

Expressing CVP Relationships 87

Cost–Volume–Profit Assumptions 89

Breakeven Point and Target Operating Income 90

Breakeven Point 90

Target Operating Income 91

Income Taxes and Target Net Income 93

Using CVP Analysis for Decision Making 94

Decision to Advertise 94

Decision to Reduce the Selling Price 95

Determining Target Prices 95

Concepts in Action: Can Cost–Volume–Profit Analysis Help Whole Foods Escape the “Whole Paycheck” Trap? 96

Sensitivity Analysis and Margin of Safety 96

Cost Planning and CVP 98

Alternative Fixed-Cost/Variable-Cost Structures 98

Operating Leverage 99

Effects of Sales Mix on Income 101

CVP Analysis in Service and Not-for-Profit Organizations 103

Contribution Margin Versus Gross Margin 104

Problem for Self-Study 105 | Decision Points 106

APPENDIX: Decision Models and Uncertainty 107

Terms to Learn 110 | Assignment Material 110 |

Questions 110 | Multiple-Choice Questions 111 |

Exercises 111 | Problems 116

4 Job Costing 122

Job Costing and the New Golden State Warriors Arena 122

Building-Block Concepts of Costing Systems 123

Job-Costing and Process-Costing Systems 124

Job Costing: Evaluation and Implementation 125

Time Period Used to Compute Indirect-Cost Rates 126

Normal Costing 128

General Approach to Job Costing Using Normal Costing 128

Concepts in Action: Better Job Costing Through Big Data and Data Analytics 131

The Role of Technology 133

Actual Costing 133

A Normal Job-Costing System in Manufacturing 135

General Ledger 136

Explanations of Transactions 136

Subsidiary Ledgers 139

Materials Records by Type of Material 139

Labor Records by Employee 140

Manufacturing Department Overhead Records by Month 141

Work-in-Process Inventory Records by Jobs 141

Finished Goods Inventory Records by Jobs 142

Other Subsidiary Records 142

Nonmanufacturing Costs and Job Costing 142

Budgeted Indirect Costs and End-of-Accounting-Year Adjustments 143

Underallocated and Overallocated Indirect Costs 143

Adjusted Allocation-Rate Approach 144

Proration Approach 144

Write-Off to Cost of Goods Sold Approach 146

Choosing Among Approaches 147

Variations of Normal Costing: A Service-Sector Example 148

Problem for Self-Study 150 | Decision Points 152 |

Terms to Learn 153 | Assignment Material 153 |

Questions 153 | Multiple-Choice Questions 154 |

Exercises 155 | Problems 161

5 Activity-Based Costing and

Activity-Based Management 167

Activity-Based Costing and the True Cost of Data Breaches 167

Broad Averaging and Its Consequences 168

Undercosting and Overcosting 168

Product-Cost Cross-Subsidization 169

Simple Costing System at Plastim Corporation 169

Design, Manufacturing, and Distribution Processes 169

Simple Costing System Using a Single Indirect-Cost Pool 170

Applying the Five-Step Decision-Making Process at Plastim 172

Refining a Costing System 173

Developments That Have Increased the Demand for Refining Costing Systems 174

Guidelines for Refining a Costing System 174

Activity-Based Costing Systems 175

Plastim’s ABC System 175

Cost Hierarchies 177

Implementing Activity-Based Costing 179

Implementing ABC at Plastim 179

Comparing Alternative Costing Systems 184

Considerations in Implementing Activity-Based

Costing Systems 185

Benefits and Costs of Activity-Based Costing Systems 185

ABC in Service and **Merchandising** Companies 186

Behavioral Issues in Implementing Activity-Based Costing Systems 186

Concepts in Action: Mayo Clinic Uses Time-Driven

Activity-Based Costing to Reduce Costs and Improve Care 187

Activity-Based Management 188

Pricing and Product-Mix Decisions 188

Cost Reduction and Process Improvement Decisions 189

Design Decisions 190

Planning and Managing Activities 190

Problem for Self-Study 190 | Decision Points 193 |

Terms to Learn 194 | Assignment Material 194 |

Questions 194 | Multiple-Choice Questions 195 |

Exercises 195 | Problems 202

6 Master Budget and Responsibility Accounting 212

“Scrimping” at the Ritz: Master Budgets 212

Budgets and the Budgeting Cycle 213

Strategic Plans and Operating Plans 213

Budgeting Cycle and Master Budget 214

Advantages and Challenges of Implementing Budgets 215

Promoting Coordination and Communication 215

Providing a Framework for Judging Performance and Facilitating Learning 215

Motivating Managers and Other Employees 215

Challenges in Administering Budgets 216

Developing an Operating Budget 216

Time Coverage of Budgets 216

Steps in Preparing an Operating Budget 217

Financial Planning Models and Sensitivity Analysis 229

Concepts in Action: P.F. Chang’s and Internet-Based Budgeting 230

Budgeting and Responsibility Accounting 231

Organization Structure and Responsibility 231 Feedback 232

Responsibility and Controllability 232

Human Aspects of Budgeting 234

Budgetary Slack 234

Stretch Targets 235

Kaizen Budgeting 236

Budgeting for Reducing Carbon Emissions 236

Budgeting in Multinational Companies 237

Problem for Self-Study 237 | Decision Points 238

APPENDIX: The Cash Budget 239

Terms to Learn 245 | Assignment Material 245 |

Questions 245 | Multiple-Choice Questions 246 |

Exercises 247 | Problems 251

7 Flexible Budgets, Direct-Cost

Variances, and Management Control 263

Walmart’s Fleet Goes Green to Reduce Standard Costs 263

Static Budgets and Variances 264

The Use of Variances 264

Static Budgets and Static-Budget Variances 264

Flexible Budgets 266

Flexible-Budget Variances and Sales-Volume Variances 268

Sales-Volume Variances 268

Flexible-Budget Variances 269

Standard Costs for Variance Analysis 270

Obtaining Budgeted Input Prices and Budgeted Input Quantities 270

Price Variances and Efficiency Variances for Direct- Cost Inputs 272

Price Variances 272

Efficiency Variance 273

Journal Entries Using Standard Costs 275

Implementing Standard Costing 277

Management’s Use of Variances 277

Concepts in Action Can Chipotle Wrap Up Its Materials-Cost Increases? 278

Multiple Causes of Variances 278

When to Investigate Variances 278

Using Variances for Performance Measurement 279

Using Variances for Organization Learning 279

Using Variances for Continuous Improvement 279

Financial and Nonfinancial Performance Measures 280

Benchmarking and Variance Analysis 280

Problem for Self-Study 281 | Decision Points 283

APPENDIX: Mix and Yield Variances for Substitutable Inputs 283

Terms to Learn 287 | Assignment Material 287 |

Questions 287 | Multiple-Choice Questions 288 |

Exercises 289 | Problems 293

8 Flexible Budgets, Overhead Cost

Variances, and Management Control 300

Managing Overhead Costs at Wework 300

Planning of Variable and Fixed Overhead Costs 301

Planning Variable Overhead Costs 301

Planning Fixed Overhead Costs 301

Standard Costing at Webb Company 302

Developing Budgeted Variable Overhead Rates 302

Developing Budgeted Fixed Overhead Rates 303

Variable Overhead Cost Variances 304

Flexible-Budget Analysis 304

Variable Overhead Efficiency Variance 305

Variable Overhead Spending Variance 306

Journal Entries for Variable Overhead Costs and Variances 307

Fixed Overhead Cost Variances 308

Production-Volume Variance 309

Interpreting the Production-Volume Variance 310

Concepts in Action: Variance Analysis and Standard

Costing Help Sandoz Manage Its Overhead Costs 312

Journal Entries for Fixed Overhead Costs and Variances 312

Integrated Analysis of Overhead Cost Variances 314

4-Variance Analysis 314

Combined Variance Analysis 316

Production-Volume Variance and Sales-Volume Variance 316

Variance Analysis and Activity-Based Costing 318

Flexible Budget and Variance Analysis for Direct Materials-Handling Labor Costs 319

Flexible Budget and Variance Analysis for Fixed

Setup Overhead Costs 321

Overhead Variances in Nonmanufacturing Settings 323

Financial and Nonfinancial Performance Measures 323

Problem for Self-Study 324 | Decision Points 326 |

Terms to Learn 327 | Assignment Material 327 |

Questions 327 | Multiple-Choice Questions 327 |

Exercises 329 | Problems 333

9 Inventory Costing and Capacity Analysis 340

Under Armour Races to Defeat Its Inventory Backlog 340

Variable and Absorption Costing 341

Variable Costing 341

Absorption Costing 341

Comparing Variable and Absorption Costing 341

Variable Versus Absorption Costing: Operating

Income and Income Statements 343

Comparing Income Statements for One Year 343

Comparing Income Statements for Multiple Years 345

Variable Costing and the Effect of Sales and

Production on Operating Income 348

Absorption Costing and Performance Measurement 349

Undesirable Buildup of Inventories 350

Proposals for Revising Performance Evaluation 351

Comparing Inventory Costing Methods 352

Throughput Costing 352

A Comparison of Alternative Inventory-Costing Methods 353

Denominator-Level Capacity Concepts and Fixed-Cost Capacity Analysis 354

Absorption Costing and Alternative

Denominator-Level Capacity Concepts 355

Effect on Budgeted Fixed Manufacturing Cost Rate 356

Choosing a Capacity Level 357

Product Costing and Capacity Management 357

Pricing Decisions and the Downward Demand Spiral 358

Concepts in Action: Can ESPN Avoid the Cord-Cutting “Death Spiral”? 359

Performance Evaluation 360

Financial Reporting 360

Tax Requirements 363

Planning and Control of Capacity Costs 363

Difficulties in Forecasting Chosen Capacity Levels 363

Difficulties in Forecasting Fixed Manufacturing Costs 364

Nonmanufacturing Costs 364

Activity-Based Costing 365

Problem for Self-Study 365 | Decision Points 367

APPENDIX: Breakeven Points in Variable Costing and Absorption Costing 368

Terms to Learn 370 | Assignment Material 370 |

Questions 370 | Multiple-Choice Questions 371 |

Exercises 371 | Problems 376

10 Determining How Costs Behave 384

Southwest Uses “Big Data Analytics” to Reduce Fuel

Consumption and Costs 384

Basic Assumptions and Examples of Cost Functions 385

Basic Assumptions 385

Linear Cost Functions 385

Review of Cost Classification 387

Identifying Cost Drivers 388

The Cause-and-Effect Criterion 388

Cost Drivers and the Decision-Making Process 388

Cost Estimation Methods 389

Industrial Engineering Method 389

Conference Method 390

Account Analysis Method 390

Quantitative Analysis Method 391

Estimating a Cost Function Using Quantitative Analysis 392

High-Low Method 393

Regression Analysis Method 395

Evaluating and Choosing Cost Drivers 396

Cost Drivers and Activity-Based Costing 399

Nonlinear Cost Functions 400

Learning Curves 402

Cumulative Average-Time Learning Model 402

Incremental Unit-Time Learning Model 403

Incorporating Learning-Curve Effects Into Prices and Standards 404

Concepts in Action: Learning Curves and the Falling Price of Renewable Energy 406

Data Collection and Adjustment Issues 406

Problem for Self-Study 408 | Decision Points 410

APPENDIX: Regression Analysis 411

Terms to Learn 420 | Assignment Material 420 |

Questions 420 | Multiple-Choice Questions 421 |

Exercises 421 | Problems 428

11 Data Analytic Thinking and Prediction 437

Predictive Analytics Inside: How Intel Drives Value and Speeds Time to Market 437

Data Science Basics and Management Accounting 438

Outcome Prediction 438

Value Creation 438

Data Science Framework 439

Concepts in Action: Carnival Uses Big Data and

Machine Learning to Sail Toward Greater Profitability 439

Defining the Problem and the Relevant Data 440

Step 1: Gain a Business Understanding of the Problem 440

Step 2: Obtain and Explore Relevant Data 441

Step 3: Prepare the Data 442

Data Algorithms and Models 443

Step 4: Build a Model 443

Refining the Decision Tree 451

Overfitting 451

Pruning 451

Validating and Choosing Models 453

Cross-Validation Using Prediction Accuracy to Choose Between Full and Pruned Decision Trees 453

Using Maximum Likelihood Values to Choose

Between Fully Grown and Pruned Decision Trees 454

Testing the Pruned Decision-Tree Model on the Holdout Sample 456

Evaluating Data Science Models 459

Step 5: Evaluate the Model 459

Step 6: Visualize and Communicate Insights 465

Working With PeerLend Digital Data 466

Using Data Science Models 469

Step 7: Deploy the Model 469

Problem for Self-Study 470 | Decision Points 472 |

Terms to Learn 473 | Assignment Material 473 |

Questions 473 | Multiple-Choice Questions 474 |

Exercises 475 | Problems 479

12 Decision Making and Relevant Information 484

Relevant Costs and Broadway Shows 484

Information and the Decision Process 485

The Concept of Relevance 485

Relevant Costs and Relevant Revenues 485

Qualitative and Quantitative Relevant Information 487

One-Time-Only Special Orders 488

Potential Problems in Relevant-Cost Analysis 490

Short-Run Pricing Decisions 491

Insourcing-Versus-Outsourcing and Make-or-Buy Decisions 492

Outsourcing and Idle Facilities 492

Strategic and Qualitative Factors 494

International Outsourcing 494

The Total Alternatives Approach 495

Concepts in Action: Starbucks Brews Up Domestic Production 495

The Opportunity-Cost Approach 496

Carrying Costs of Inventory 499

Product-Mix Decisions With Capacity Constraints 500

Bottlenecks, Theory of Constraints, and Throughput-Margin Analysis 502

Customer Profitability and Relevant Costs 505

Relevant-Revenue and Relevant-Cost Analysis of Dropping a Customer 506

Relevant-Revenue and Relevant-Cost Analysis of Adding a Customer 508

Relevant-Revenue and Relevant-Cost Analysis of

Closing or Adding Branch Offices or Business Divisions 508

Irrelevance of Past Costs and Equipment-Replacement Decisions 509

Decisions and Performance Evaluation 511

Problem for Self-Study 513 | Decision Points 515

APPENDIX: Linear Programming 516

Terms to Learn 519 | Assignment Material 519 |

Questions 519 | Multiple-Choice Questions 520 |

Exercises 520 | Problems 526

13 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 535

Barclays Turns to the Balanced Scorecard 535

What Is Strategy? 536

Strategy Implementation and the Balanced Scorecard 538

The Balanced Scorecard 538

Strategy Maps and the Balanced Scorecard 539

Implementing a Balanced Scorecard 545

Different Strategies Lead to Different Scorecards 546

Environmental and Social Performance and the Balanced Scorecard 546

Features of a Good Balanced Scorecard 549

Pitfalls in Implementing a Balanced Scorecard 550

Evaluating the Success of Strategy and Implementation 551

Strategic Analysis of Operating Income 552

Growth Component of Change in Operating Income 554

Price-Recovery Component of Change in Operating Income 555

Productivity Component of Change in Operating Income 556

Further Analysis of Growth, Price-Recovery, and Productivity Components 557

Concepts in Action: Operating Income Analysis and the

Decline of Casual Dining Restaurants 559

Downsizing and the Management of Capacity 560

Identifying Unused Capacity Costs 560

Managing Unused Capacity 560

Problem for Self-Study 561 | Decision Points 565

APPENDIX: Productivity Measurement 565

Terms to Learn 568 | Assignment Material 568 |

Questions 568 | Multiple-Choice Questions 569 |

Exercises 569 | Problems 572

14 Pricing Decisions and Cost Management 580

Extreme Pricing and Cost Management at IKEA 580

Major Factors That Affect Pricing Decisions 581

Customers 581

Competitors 581

Costs 581

Weighing Customers, Competitors, and Costs 582

Costing and Pricing for the Long Run 582

Calculating Product Costs for Long-Run Pricing Decisions 583

Alternative Long-Run Pricing Approaches 586

Market-Based Approach: Target Costing for Target Pricing 587

Understanding Customers’ Perceived Value 587

Competitor Analysis 587

Implementing Target Pricing and Target Costing 587

Concepts in Action: Zara Uses Target Pricing to

Become the World’s Largest Fashion Retailer 588

Value Engineering, Cost Incurrence, and Locked-In Costs 589

Value-Chain Analysis and Cross-Functional Teams 590

Achieving the Target Cost per Unit for Provalue 591

Cost-Plus Pricing 593

Cost-Plus Target Rate of Return on Investment 593

Alternative Cost-Plus Methods 594

Cost-Plus Pricing and Target Pricing 595

Life-Cycle Product Budgeting and Costing 596

Life-Cycle Budgeting and Pricing Decisions 596

Managing Environmental and Sustainability Costs 598

Customer Life-Cycle Costing 598

Noncost Factors in Pricing Decisions 598

Predatory Pricing 599

Collusive Pricing 599

Price Discrimination 599

International Pricing 600

Peak-Load Pricing 600

Problem for Self-Study 600 | Decision Points 602 |

Terms to Learn 603 | Assignment Material 604 |

Questions 604 | Multiple-Choice Questions 604 |

Exercises 604 | Problems 609

15 Cost Allocation, Customer- Profitability Analysis, and Sales- Variance Analysis 614

Starbucks Rewards Starts Rewarding Big Spenders 614

Customer-Profitability Analysis 615

Customer-Revenue Analysis 615

Customer-Cost Analysis 616

Customer-Level Costs 617

Customer-Profitability Profiles 620

Concepts in Action: Amazon Prime and Customer Profitability 621

Presenting Profitability Analysis 621

Using the Five-Step Decision-Making Process to Manage Customer Profitability 623

Cost-Hierarchy-Based Operating Income Statement 623

Criteria to Guide Cost Allocations 626

Fully Allocated Customer Profitability 627

Implementing Corporate and Division Cost Allocations 628

Issues in Allocating Corporate Costs to Divisions and Customers 632

Using Fully Allocated Costs for Decision Making 633

Sales Variances 633

Static-Budget Variance 634

Flexible-Budget Variance and Sales-Volume Variance 635

Sales-Mix Variance 636

Sales-Quantity Variance 637

Market-Share and Market-Size Variances 638

Market-Share Variance 638

Market-Size Variance 638

Problem for Self-Study 640 | Decision Points 642 |

Terms to Learn 643 | Assignment Material 643 |

Questions 643 | Multiple-Choice Questions 644 |

Exercises 644 | Problems 649

16 Allocation of Support-Department Costs, Common Costs, and Revenues 657

Cost Allocation and the United States Postal Service 657

Allocating Support Department Costs Using the Single-Rate and Dual-Rate Methods 658

Single-Rate and Dual-Rate Methods 658

Allocation Based on the Demand for (or Usage of) Materials-Handling Services 659

Allocation Based on the Supply of Capacity 660

Advantages and Disadvantages of Single-Rate Method 661

Advantages and Disadvantages of Dual-Rate Method 662

Budgeted Versus Actual Costs and the Choice of Allocation Base 663

Budgeted Versus Actual Rates 663

Budgeted Versus Actual Usage 664

Fixed-Cost Allocation Based on Budgeted Rates and Budgeted Usage 664

Fixed-Cost Allocation Based on Budgeted Rates and Actual Usage 664

Allocating Budgeted Fixed Costs Based on Actual Usage 665

Allocating Costs of Multiple Support Departments 666

Direct Method 668

Step-Down Method 669

Reciprocal Method 671

Overview of Methods 674

Calculating the Cost of Job WPP 298 675

Allocating Common Costs 676

Stand-Alone Cost-Allocation Method 677

Incremental Cost-Allocation Method 677

Cost Allocations and Contract Disputes 678

Concepts in Action: Contract Disputes Over Reimbursable Costs With the U.S. Government 679

Bundled Products and Revenue Allocation Methods 680

Bundling and Revenue Allocation 680

Stand-Alone Revenue-Allocation Method 680

Incremental Revenue-Allocation Method 681

Problem for Self-Study 684 | Decision Points 686 |

Terms to Learn 687 | Assignment Material 687 |

Questions 687 | Exercises 687 | Problems 691

17 Cost Allocation: Joint Products and Byproducts 697

Joint-Cost Allocation and the Wounded Warrior Project 697

Joint-Cost Basics 698

Concepts in Action: Big Data Joint Products and Byproducts Create New Business Opportunities 699

Allocating Joint Costs 700

Approaches to Allocating Joint Costs 700

Sales Value at Splitoff Method 702

Physical-Measure Method 702

Net Realizable Value Method 704

Constant Gross-Margin Percentage NRV Method 706

Choosing an Allocation Method 707

Not Allocating Joint Costs 708

Why Joint Costs Are Irrelevant for Decision Making 708

Sell-or-Process-Further Decisions 708

Decision Making and Performance Evaluation 709

Pricing Decisions 709

Accounting for Byproducts 710

Production Method: Byproducts Recognized at Time Production Is Completed 710

Sales Method: Byproducts Recognized at Time of Sale 712

Problem for Self-Study 713 | Decision Points 715 |

Terms to Learn 716 | Assignment Material 716 |

Questions 716 | Multiple-Choice Questions 717 |

Exercises 718 | Problems 723

18 Process Costing 728

Cryptocurrency and FIFO Versus LIFO Accounting 728

Illustrating Process Costing 729

Case 1: Process Costing With Zero Beginning or Ending Work-in-Process Inventory 730

Case 2: Process Costing With Zero Beginning and Some Ending Work-in-Process Inventory 731

Summarizing the Physical Units and Equivalent Units (Steps 1 and 2) 732

Calculating Product Costs (Steps 3, 4, and 5) 733 Journal Entries 734

Case 3: Process Costing With Some Beginning and Some Ending Work-in-Process Inventory 736

Weighted-Average Method 736

First-In, First-Out Method 739

Comparing the Weighted-Average and FIFO Methods 743

Transferred-In Costs in Process Costing 744

Transferred-In Costs and the Weighted-Average Method 745

Transferred-In Costs and the FIFO Method 747

Points to Remember About Transferred-In Costs 748

Hybrid Costing Systems 748

Overview of Operation-Costing Systems 749

Concepts in Action: Hybrid Costing for Adidas Customized 3D Printed Shoes 749

Illustrating an Operation-Costing System 750 Journal Entries 751

Problem for Self-Study 752 | Decision Points 754

APPENDIX: Standard-Costing Method of Process Costing 755

Terms to Learn 759 | Assignment Material 759 |

Questions 759 | Multiple-Choice Questions 759 |

Exercises 761 | Problems 764

19 Spoilage, Rework, and Scrap 769

Rework Hampers Tesla Model 3 Production 769

Defining Spoilage, Rework, and Scrap 770

Two Types of Spoilage 770

Normal Spoilage 770

Abnormal Spoilage 771

Spoilage in Process Costing Using Weighted-Average and FIFO 771

Count All Spoilage 771

Five-Step Procedure for Process Costing With Spoilage 772

Weighted-Average Method and Spoilage 773

FIFO Method and Spoilage 775

Journal Entries 777

Inspection Points and Allocating Costs of Normal Spoilage 777

Job Costing and Spoilage 780

Job Costing and Rework 781

Accounting for Scrap 782

Recognizing Scrap at the Time of Its Sale 783

Recognizing Scrap at the Time of Its Production 784

Concepts in Action: Google’s Zero Waste to Landfill Initiative 785

Problem for Self-Study 785 | Decision Points 786

APPENDIX: Standard-Costing Method and Spoilage 787

Terms to Learn 788 | Assignment Material 789 |

Questions 789 | Multiple-Choice Questions 789 |

Exercises 790 | Problems 793

20 Balanced Scorecard: Quality and Time 797

“Dieselgate” Derails Volkswagen’s Grand Ambitions 797

Quality as a Competitive Tool 798

The Financial Perspective: The Costs of Quality 799

Using Nonfinancial Measures to Evaluate and Improve Quality 801

The Customer Perspective: Nonfinancial Measures of Customer Satisfaction 802

The Internal-Business-Process Perspective: Analyzing Quality Problems and Improving Quality 802

The Learning-and-Growth Perspective: Quality Improvements 805

Weighing the Costs and Benefits of Improving Quality 805

Evaluating a Company’s Quality Performance 807

Time as a Competitive Tool 808

Customer-Response Time and On-Time Performance 808

Time Drivers and Bottlenecks 809

Concepts in Action: Facebook Works to Overcome Mobile Data Bottlenecks 810

Relevant Revenues and Costs of Delays 812

Balanced Scorecard and Time-Based Measures 814

Problem for Self-Study 815 | Decision Points 816 |

Terms to Learn 817 | Assignment Material 817 |

Questions 817 | Multiple-Choice Questions 817 |

Exercises 818 | Problems 822

21 Inventory Management, Just-in-Time, and Simplified Costing Methods 827

Target Leverages the Internet of Things to Respond to the Changing Retail Landscape 827

Inventory Management in Retail Organizations 828

Costs Associated With Goods for Sale 828

The Economic-Order-Quantity Decision Model 829

When to Order, Assuming Certainty 831

Safety Stock 832

Estimating Inventory-Related Relevant Costs and Their Effects 834

Cost of a Prediction Error 834

Conflicts Between the EOQ Decision Model and Managers’ Performance Evaluation 835

Just-in-Time Purchasing 836

JIT Purchasing and EOQ Model Parameters 836

Relevant Costs of JIT Purchasing 836

Supplier Evaluation and Relevant Costs of Quality and Timely Deliveries 838

JIT Purchasing, Planning and Control, and Supply-Chain Analysis 840

Inventory Management, MRP, and JIT Production 841

Materials Requirements Planning 841

Just-in-Time (JIT) Production 841

Features of JIT Production Systems 841

Concepts in Action: Just-in-Time Live Concert Recordings 842

Costs and Benefits of JIT Production 843

JIT in Service Industries 843

Enterprise Resource Planning (ERP) Systems 844

Performance Measures and Control in JIT Production 844

Effect of JIT Systems on Product Costing 844

Backflush Costing 845

Simplified Normal or Standard-Costing Systems 845

Lean Accounting 853

Problems for Self-Study 856 | Decision Points 857 |

Terms to Learn 858 | Assignment Material 858 |

Questions 858 | Multiple-Choice Questions 859 |

Exercises 860 | Problems 862

22 Capital Budgeting and Cost Analysis 867

NPV and California’s New Residential Solar Panel Rules 867

Stages of Capital Budgeting 868

Concepts in Action: AkzoNobel Integrates Sustainability Into Capital Budgeting 870

Discounted Cash Flow 871

Net Present Value Method 872

Internal Rate-of-Return Method 873

Comparing the Net Present Value and Internal Rate-of-Return Methods 875

Sensitivity Analysis 875

Payback Method 876

Uniform Cash Flows 876

Nonuniform Cash Flows 877

Accrual Accounting Rate-of-Return Method 879

Relevant Cash Flows in Discounted Cash Flow Analysis 880

Relevant After-Tax Flows 881

Categories of Cash Flows 882

Project Management and Performance Evaluation 886

Post-Investment Audits 886

Performance Evaluation 887

Strategic Considerations in Capital Budgeting 887

Investment in Research and Development 888

Customer Value and Capital Budgeting 888

Problem for Self-Study 889 | Decision Points 891

APPENDIX: Capital Budgeting and Inflation 892

Terms to Learn 894 | Assignment Material 895 |

Questions 895 | Multiple-Choice Questions 895 |

Exercises 896 | Problems 900 | Answers to Exercises in Compound Interest (Exercise 22-21) 904

23 Management Control Systems, Transfer Pricing, and Multinational Considerations 905

Apple Forced to Pay Ireland €14.3 Billion in Tax Settlement 905

Management Control Systems 906

Formal and Informal Systems 906

Effective Management Control 907

Decentralization 907

Benefits of Decentralization 908

Costs of Decentralization 908

Comparing Benefits and Costs 909

Decentralization in Multinational Companies 910

Choices About Responsibility Centers 910

Transfer Pricing 911

Criteria for Evaluating Transfer Prices 911

Calculating Transfer Prices 912

An Illustration of Transfer Pricing 912

Market-Based Transfer Prices 915

Perfect Competition 915

Imperfect Competition 915

Cost-Based Transfer Prices 916

Full-Cost Bases 916

Variable-Cost Bases 918

Hybrid Transfer Prices 918

Prorating the Difference Between Maximum and Minimum Transfer Prices 919

Negotiated Pricing 919

Dual Pricing 920

A General Guideline for Transfer-Pricing Situations 921

How Multinationals Use Transfer Pricing to

Minimize Their Income Taxes 923

Concepts in Action: IRS Accuses Medtronic of Unfair Tax Deal 924

Transfer Prices Designed for Multiple Objectives 926

Problem for Self-Study 926 | Decision Points 928 |

Terms to Learn 930 | Assignment Material 930 |

Questions 930 | Exercises 930 | Problems 934

24 Performance Measurement, Compensation, and Multinational Considerations 941

CEO Compensation at General Electric 941

Financial and Nonfinancial Performance Measures 942

Accounting-Based Measures for Business Units 943

Return on Investment 943

Residual Income 945

Economic Value Added 947

Return on Sales 948

Comparing Performance Measures 949

Choosing the Details of the Performance Measures 949

Alternative Time Horizons 949

Alternative Definitions of Investment 950

Alternative Asset Measurements 950

Target Levels of Performance and Feedback 953

Choosing Target Levels of Performance 954

Choosing the Timing of Feedback 954

Performance Measurement in Multinational Companies 954

Calculating a Foreign Division’s ROI in the Foreign Currency 955

Calculating a Foreign Division’s ROI in U.S. Dollars 956

Distinguishing the Performance of Managers From the Performance of Their Subunits 957

The Basic Tradeoff: Creating Incentives Versus Imposing Risk 957

Intensity of Incentives and Financial and Nonfinancial Measurements 958

Concepts in Action: Performance Measurement at Unilever 959

Benchmarks and Relative Performance Evaluation 959

Performance Measures at the Individual Activity Level 959

Executive Performance Measures and Compensation 960

Strategy and Levers of Control 961

Boundary Systems 962

Belief Systems 963

Interactive Control Systems 963

Problem for Self-Study 963 | Decision Points 965 |

Terms to Learn 966 | Assignment Material 966 |

Questions 966 | Multiple-Choice Questions 966 |

Exercises 967 | Problems 972

Appendix A: Notes on Compound Interest and Interest

Tables 978

Glossary 986

Index 997