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MANAGEMENT and
COSTACCOUNTING
Charles
T.
Horngren
Stanford University
Alnoor Bhimani
London School
of
Economics
Srikant M. Datar
Harvard University
George Foster
Stanford University
FT Prentice Hall
FINANCIAL TIMES
An imprint
of
Pearson Education
Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Singapore • Hong Kong
Tokyo • Seoul • Taipei • New Delhi • Cape Town • Madrid • Mexico City • Amsterdam • Munich • Paris • Milan
Contents
Preface xv
Guided tourof the book xviii
Guided tour to Student resources on the web xx
Guide to case studies xxii
Acknowledgements xxiv
PART
I
Management
and
cost
accounting fundamentals
The accountant's role
in the
Organisation
4
Accounting, costing and strategy 5
Accounting Systems and management
controls 7
Costs, benefits and context 12
Themes in the design of management
accounting Systems 14
#
Concepts
in
action:
E-business strategies
and the management accountant 17
•
Surveys
of
Company
practice:
Management
accounting Information needs 19
Forces of change in management accounting 19
Summary 23
Appendix: Professional ethics 23
Key terms 25
Further reading 26
Weblinks 26
Assessment material 27
An introduction
to
cost terms
and purposes
34
Costs in general 35
Direct costs and indirect costs 36
Cost drivers and cost management 37
Two types of cost behaviour pattern:
variable costs and fixed costs 38
•
Surveys
of
Company
practice:
Purposes
for distinguishing between variable costs
and fixed costs 40
Total costs and unit costs 42
•
Concepts
in
action:
How application
Service
Providers
[ASPs]
influence cost structures 43
Financial Statements and cost terminology 45
Service-sector companies 45
Merchandising- and manufacturing-sector
companies 46
The many meanings of product costs 49
Classifications of costs 50
Summary 50
Key terms 51
Weblinks 52
Assessment material 53
Job-costing Systems
61
The building block concept of costing Systems 62
Job-costing and process-costing Systems 62
Job costing in Service organisations using
actual costing 64
Normal costing 66
Job costing in manufacturing 68
•
Surveys
of
Company
practice:
Cost-allocation
bases used for manufacturing overhead 72
An illustration of a job-costing System in
manufacturing 72
Budgeted indirect costs and end-of-period
adjustments 78
Summary 82
Key terms 83
Weblinks 83
Assessment material 84
VII
Contents
Process-costing Systems
Illustrating process costing
Case 1: Process costing with no opening or
closing work-in-progress stock
Case 2: Process costing with no opening
but a closing work-in-progress stock
Case 3: Process costing with both some
opening and some closing work-in-
progress stock
Weighted-average method
First-in,
first-out method
Comparison of weighted-average and FIFO
methods
92
93
94
95
99
100
103
107
Standard-costing method of process costing 109
Transferred-in costs in process costing 113
•
Concepts
in
action:
Hybrid costing for
customised products at Levi Strauss 114
Hybrid-costing Systems 120
Summary 120
Appendix: Operation costing 121
Key terms 124
Weblinks 125
Assessment material 126
Cost allocation
132
Purposes of cost allocation 133
Cost-benefit issues and other contextual
factors 134
Cost allocation and costing Systems 135
Indirect cost pools and cost allocation 137
Allocating costs from one department
toanother 139
Allocating costs of Support departments 142
Support department cost-allocation methods 143
Allocating common costs 149
Cost-allocation bases and cost hierarchies 151
Is the product-costing System broken? 153
Summary 153
Key terms 154
Further reading 154
Weblinks 155
Assessment material 156
Cost allocation: joint-cost situations
165
Meaning of Joint products and by-products
terms 166
Why allocate Joint costs? 167
Approaches to allocating Joint costs 168
•
Concepts
in
action:
Chicken
processing:
costing on the disassembly [ine 176
No allocation of Joint costs 177
Irrelevance of Joint costs for decision making 177
• Surveys of
Company
practice: Joint-cost
allocation in the oil patch 178
Accounting for by-products 181
Summary 183
Key terms 184
Further reading 184
Weblinks 184
Assessment material 186
Income effects
of
alternative stock-
costing methods
194
PART ONE: Stock-costing methods 195
Variable costing and absorption costing 195
Comparison of variable costing and
absorption costing 199
Capsule comparison of stock-costing
methods 204
Performance measures and absorption
costing 206
• Surveys of
Company
practice:
Company usage
of variable costing 208
PART TWO: Denominator-level concepts
and absorption costing 208
Alternative denominator-level concepts 208
Effect on financial Statements 210
Summary 212
Appendix: Breakeven points in variable
and absorption costing 213
Key terms 214
Weblinks 215
Assessment material 216
VIII
101 The European Savings Bank
102 The ethical dilemma at Northlake
103 Electronic Boards plc
222
222
224
227
Accounting information
for
decision making
Cost-volume-profit relationships
232
Revenue drivers and cost drivers 233
CVPassumptions 234
The breakeven point 235
ThePVgraph 238
Impact of income taxes 239
Sensitivity analysis and uncertainty 240
•
Concepts
in
action: Influencing cost
structures to manage the risk-return
trade-off at
Amazon.com
242
Cost planning and CVP 243
Effects of revenue mix on profit 245
Not-for-profit organisations and CVP 246
Contribution margin and gross margin 247
Summary 248
Appendix: Decision models and uncertainty 249
Key terms 253
Weblinks 253
Assessment material 254
Contents
Non-linearity and cost functions 277
Learning curves and non-linear
cost functions 279
Summary 283
Appendix: Regression analysis 284
Key terms 293
Weblinks 293
Assessment material 294
Relevant information
for
decision
making301
Information and the decision process 302
The concept of relevance 303
An illustration of relevance: choosing Output
levels 305
Outsourcing and make-or-buy decisions 307
Opportunity costs, outsourcing and capacity
constraints 310
#
Concepts
in
action:
VW
takes
outsourcing
tothelimit 314
Product-mix decisions under capacity
constraints 315
Customer profitability and relevant costs 316
Irrelevance of past costs and equipment-
replacement decisions 318
Summary 321
Appendix: Linear programming 322
Key terms 326
Further reading 326
Weblinks 326
Assessment material 328
Determining how costs behave
262
Genei
JI
ibüuej in eülmidlmy
>_o;>l
luncliuiib 263
The cause-and-effect criterion in choosing
cost drivers 266
Cost estimation approaches 267
Steps in estimating a cost function 268
Evaluating and choosing cost drivers 274
Cost drivers and activity-based costing 276
•
Concepts
in
action: Activity-based costing
and cost estimation
276
Activity-based costing
Undercosting and overcosting
Costing System at Plastim Limited
Refining a costing system
Activity-based costing Systems
Implementing ABC at Plastim Limited
Comparing alternative costing Systems
Using ABC Systems for cost and profit
management
341
342
345
345
349
354
355
ix
Contents
ABC
and
department-costing Systems
357
Implementing
ABC
Systems
358
m
Concepts
in action: Do banks provide 'free'
Services? 359
• Surveys of
Company
practice: Growing
interest
in
activity-based costing
360
•
Concepts
in action: Banking on ABC
and ABM information
361
ABC
and the
organisational context
362
Summary
364
Key terms
364
Further reading
365
Weblinks
365
Assessment material
366
Major influences
on
pricing
374
Product-cost categories
and
time horizon
375
Costing
and
pricing
for the
short
run 375
Costing
and
pricing
for the
long
run 377
Target costing
for
target pricing
380
Achieving
the
target cost
per
unit
for
Provalue
384
m
Concepts
in
action:
Achieving target costs
using activity-based management
at
Carrier
Ltd 387
Cost-plus pricing
388
Life-cycle product budgeting
and
costing
390
Customer-profitability analysis
393
Customer revenues
393
Customer costs
394
• Surveys of
Company
practice:
Customer-
profitability analysis attracts increasing
attention
397
Customer-profitability profiles
397
•
Concepts in
action:
Managing
profits by
understanding customers
399
Summary
400
Key terms
Further reading
Weblinks
Assessment material
401
402
402
403
Two focuses
of
cost analysis
Stages
of
capital budgeting
Discounted cash-flow methods
Sensitivity analysis
412
413
415
419
Relevant cash flows
in
discounted cash-flow
analysis
421
Payback method
424
Accounting rate-of-return method
426
• Surveys of
Company
practice: International
comparison
of
capital-budgeting methods
426
Complexities
in
capital-budgeting
applications
427
Managing
the
project
429
Income
tax
factors
430
Capital budgeting
and
inflation
431
Choosing between
the net
present-value
and
the
internal rate-of-return decision
approaches
432
Summary
433
Key terms
434
Further reading
435
Weblinks
435
Assessment material
436
,. .
..t.n.jj»
pf u«, v: 448
201 Permaclean Products
plc 448
202
The
Dublin Shirt Company
450
203 Tankmaster Manufacturing Company
457
204 Internet customer acquisition strategy
at Bankinter
459
205 Torquemada
PLC 473
206 Mercedes Benz:
All
Activity Vehicles
475
207 Colombo Frozen Yogurt
480
Contents
Planning and budgetary
control Systems
Motivation, budgets
and
responsibility accounting
Flexible budgets, variances
and
phanagement control:
I
Weblinks
Assessment material
549
550
486
Major features of budgets
Roles of budgets
Types of budget
Computer-based financial planning models
®
Concepts
in action: Putting budgeting
on
the fast track with
web
technology
Kaizen budgeting
Activity-based budgeting
Budgeting and responsibility accounting
Responsibility and controllability
Budgeting: a discipüne in transition
Summary
Appendix: The cash budget
Key terms
Further reading
Weblinks
Assessment material
487
488
493
503
504
504
505
507
508
509
510
511
517
517
517
519
526
Static budgets and flexible budgets
Static-budget variances
Steps in developing a flexible budget
Flexible-budget variances and sales-
volume variances
Price variances and efficiency variances
for inputs
Impact of Stocks
Management uses of variances
Flexible budgeting and activity-based costing
An illustration of Journal entries using
Standard costs
Benchmarking and variance analysis
Summary
Key terms
527
528
529
530
532
537
539
542
544
545
547
548
Flexible budgets, variances and
management control:
II
561
Developing budgeted variable-overhead
rates
563
Variable-overhead cost variances
564
Developing budgeted fixed-overhead rates
568
Fixed-overhead cost variances
569
Production-volume variance
570
Integrated analysis
of
overhead cost
variances
571
Different purposes
of
manufacturing
overhead cost analysis
573
Journal entries
for
overhead costs
and
variances
574
Engineered, discretionary and infrastructure
costs
576
Financial
and
non-financial Performance
measures
577
Actual,
normal
and
Standard costing
578
Activity-based costing
and
variance analysis
581
Summary
585
Key terms
586
Weblinks
587
Assessment material
588
Measuring yield, mjx and quantity
effects
Input variances
Direct materials yield and mix variances
Direct manufacturing labour yield and mix
variances
Revenue and sales variances
Variance analysis for multiple products
Summary
Key terms
Weblinks
Assessment material
599
599
604
607
608
615
615
616
617
XI
Contents
301 Zeros
plc
302 Instrumental
Ltd
303 Fiddler
Ltd
304 Letsgo Travel Trailers
305 Hereford Steak Houses
622
622
624
626
628
633
Management control Systems
and Performance issues
Management control Systems
639
Evaluating management control Systems
640
Organisational structure
and
decentralisation
640
#
Concepts
in action: Microsofts approach
to
managing responsibility
Choices about responsibility centres
Transfer pricing
An illustration
of
transfer pricing
Market-based transfer prices
Cost-based transfer prices
Negotiated transfer prices
• Surveys of
Company
practice: Domestic
transfer-pricing practices
in the UK
A general guideline
for
transfer-pricing
situations
Transfer pricing
and tax
considerations
Summary
Key terms
Further reading
Weblinks
Assessment material
641
643
644
645
648
649
652
652
653
654
655
656
656
656
658
. \^
;_gj!*-
-; ., -••
t .. ..
Financial
and
non-financial Performance
measures
666
Designing
an
accounting-based Performance
measure
667
Different Performance measures
667
• Concepts
in
action: Equifax, AT& T
and
EVA®
674
Alternative definitions
of
investment
675
Alternative Performance measures
675
Choosing targeted levels
of
Performance
and
timing
of
feedback
Distinction between managers
and
organisational units
Performance measures
at the
individual
activity Level
Environmental
and
ethical responsibilities
Summary
Key terms
Further reading
Weblinks
Assessment material
678
679
682
683
684
684
685
685
686
401 BBRplc
402 Cresta Plating Company
Ltd
403 Caja Espana
694
694
698
704
•S
PART
V
Quality, time and
the
Strategie
management
of
costs
Quality
and throughput concerns
in
managing
costs
718
Quality
as a
competitive weapon
719
Costs
of
quality
720
Techniques used
to
identify quality problems
723
Relevant costs
and
benefits
of
quality
improvement
m
Concepts
in action: Does Mercedes stand
for quality?
m
Concepts
in action: Putting
the
customer
first
725
727
728
Non-financial measures
of
quality
and
customer satisfaction
729
Evaluating quality Performance
731
XII
Contents
Theory of constraints and throughput
accounting 731
%
Concepts
in
action:
Throughput accounting
at Allied-Signal, Skelmersdale, UK 734
Summary 735
Key terms 736
Further reading 736
Weblinks 736
Assessment material 738
Accounting for just-fn-tim
Just-in-time Systems 747
Major features of JIT production Systems 747
Enterprise resource planning (ERP) Systems 751
Backflush costing 752
»
Concepts
in
action:
Implementing JITat
Andreas Stihl
KG
753
Managing goods for sale in retail
organisations 761
Challenges in estimating stock-related
costs and their effects 767
Just-in-time purchasing 768
#
Concepts
in
action:
Porsches just-in-time
revival 770
Stock costs and their management in
manufacturing organisations 772
Summary 775
Key terms 775
Further reading 776
Weblinks 776
Assessment material 777
Strategie management
ao
Conceptions of strategy
•
Concepts in
action:
Changing
Strategie gears
What is Strategie management accounting? 790
The balanced scorecard 792
Evaluating the success of a strategy 798
Thetableau debord 801
• Surveys
of
Company
practice:
Management aecountants' involvement
in Strategie planning activities
803
Enterprise governance
and
strategy
804
The Strategie management accounting
Potential
806
Summary
807
Key terms
808
Further reading
808
Weblinks
809
Assessment material
810
816
501 High-Tech
Ltd 816
502 Endesa: measuring
and
Controlling
value
823
503
The
Co-operative Bank
833
504 Osram
848
505 Coors
852
Appendix A: Solutions
to
selected exercises
859
Appendix
B:
Notes
on
compound interest
and interest tables
933
Bibliography
941
Glossary
948
Index ofnames
962
Generalindex
964
XIII