Sie sind auf Seite 1von 25

Cost Management

A Strategic Emphasis

Cost Management

A Strategic Emphasis

Boston

Burr Ridge, IL

Fourth Edition

Edward J. Blocher

University of North Carolina at Chapel Hill Kenan-Flagler Business School

David E. Stout

Youngstown State University Williamson College of Business Administration

Gary Cokins

Strategist, Performance Management Solutions SAS/Worldwide Strategy

Kung H. Chen

University of Nebraska—Lincoln School of Accountancy

Chen University of Nebraska—Lincoln School of Accountancy Dubuque, IA Madison, WI New York San Francisco St.

Dubuque, IA

Madison, WI

New York

San Francisco

St. Louis

Bangkok

Bogotá

Caracas

Kuala Lumpur

Lisbon

London

Madrid

Mexico City

Milan

Montreal

New Delhi

Santiago

Seoul

Singapore

Sydney

Taipei

Toronto

COST MANAGEMENT: A STRATEGIC EMPHASIS Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies,

COST MANAGEMENT: A STRATEGIC EMPHASIS

Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 CCW/CCW 0 9 8 7 6

ISBN: 978-0-07-312815-3 MHID: 0-07-312815-5

Editorial director: Stewart Mattson Executive editor: Tim Vertovec Developmental editor: Daryl Horrocks Executive marketing manager: Krista Bettino Senior media producer: Victor Chiu Project manager: Bruce Gin Production supervisor: Gina Hangos Designer: Cara David Supplement producer: Ira C. Roberts Media project manager: Matthew Perry Cover design: Dave Seidler Typeface: 10/12 Times Roman Compositor: Laserwords Private Limited, Chennai, India Printer: Courier Westford

Library of Congress Cataloging-in-Publication Data

Cost management: a strategic emphasis/Edward J. Blocher

[et al.].—4th ed.

p. cm. Includes index. ISBN: 978-0-07-312815-3 (alk. paper) MHID: 0-07-312815-5 (alk. paper) 1. Cost accounting. 2. Managerial accounting. I. Blocher, Edward. HF5686.C8B559 2008

658.15'52—dc22

www.mhhe.com

2006017239

We dedicate this edition

To my wife Sandy, and our children Joseph and David

Ed Blocher

To my wife Anne, and our children David John and Kevin Michael

David E. Stout

To my wife Pam Tower, and my mentor Robert A. Bonsack, a true craftsman in the field of cost management

Gary Cokins

To my wife Mary, and our children Robert and Melissa

Kung Chen

Meet the Authors

Meet the Authors Edward J. Blocher is Professor of Accounting at the Kenan-Flagler Business School at
Meet the Authors Edward J. Blocher is Professor of Accounting at the Kenan-Flagler Business School at

Edward J. Blocher is Professor of Accounting at the Kenan-Flagler Business School at the University of North Carolina. He received his bachelor’s degree in economics from Rice University, his MBA degree from Tulane University, and his PhD in accounting from the University of Texas at Austin. He has been a faculty member at the University of North Carolina since 1976. He has also been on the faculty of Northwestern University. Professor Blocher presents regularly on strategic cost management at the national meetings of both the American Accounting Association and the Institute of Management Accountants. While he is involved in a number of accounting organizations, Professor Blocher has been most continually active in the Institute of Management Accountants (IMA), where he is now a trustee of the IMA/FAR (Foundation for Applied Research). He is a Certified Management Accountant (CMA), has taught review courses for the CMA exam, and has served on the Institute’s national education committee. He also presents regularly at the annual national conference of the IMA. Professor Blocher is the author or coauthor of several articles appear- ing in various journals. Putting research and teaching into practice is important to Professor Blocher, who has worked closely with other firms and organizations in developing products, publications, and teaching materials. He was the principal designer of an accounting analysis system developed by Financial Audit Systems, Inc. Also, he has worked with Blue Cross and Blue Shield of North Carolina, the American Institute of CPAs, KPMG Peat Marwick, Grant Thornton, and the Chancellor’s Office at the University of North Carolina at Chapel Hill, among others.

David E. Stout is the John S. and Doris M. Andrews Professor of Accounting, Williamson College of Business Administration, Youngstown State University. Previously, he held the position of the John M. Cooney Professor of Accounting, College of Commerce & Finance, Villanova University. David earned his PhD (1982) from the University of Pittsburgh and teaches primarily in the cost/managerial accounting area. He served previously as editor of Issues in Accounting Education and serves currently as an associate editor of the Journal of Accounting Education and as a member of the editorial board of: Issues in Accounting Education; the Journal of International Accounting, Auditing & Taxation; China Finance and Accounting Review, and Management Accounting Quarterly/Strategic Finance. In addition, he serves as a member of the editorial advisory board of Accounting Education: An International Journal. Professor Stout has published over 60 articles in numerous professional and academic journals including Advances in Accounting Education, Issues in Accounting Education, the Journal of Accounting Education, The Accounting Educators’Journal, Advances in Accounting Education, Behavioral Research in Accounting, Educational and Psychological Measurement, Management Accounting, Management Accounting Quarterly, Financial Practice and Education, Strategic Finance, and Advances in Accounting. David is past president of the Teaching and Curriculum (T&C) Section of the AAA, and president-elect of the Academy of Business Education (ABE).

Meet the Authors

vii

Meet the Authors vii Gary Cokins is a strategist in performance management solutions with SAS, the
Meet the Authors vii Gary Cokins is a strategist in performance management solutions with SAS, the

Gary Cokins is a strategist in performance management solutions with SAS, the world’ s largest privately owned software vendor. He is an internationally recognized expert, speaker, and author in advanced cost management and performance improvement systems. Gary received a BS degree with honors in Industrial Engineering/Operations Research from Cornell University in 1971. He received his MBA from Northwestern University’s Kellogg School of Management in 1974. Gary serves on activity-based information committees including CAM-I, APICS, the Supply Chain Council, the Council for Logistics Management (CLM), the Institute of Management Accountants (IMA), the American Society for Quality (ASQ), the Purchasing Management Association of Canada (PMAC), the Institute of Industrial Engineers (IIE), Association for Management Information in Financial Services (AMI/fs), and the American Institute of CPAs (AICPA).

Kung H. Chen is the Steinhardt Foundation Professor of Accounting and the Director

of Graduate Programs in the School of Accountancy at the University of Nebraska-Lincoln.

A graduate of National Taiwan University, he earned his MBA degree from West Virginia

University and a PhD from the University of Texas-Austin. Professor Chen has published his research in various journals, including The Account- ing Review, Encyclopedia of Accounting, Internal Auditor, Journal of Business Finance and Accounting, Behavioral Research in Accounting, Journal of Accounting Literature, Advances in Accounting, Financial Management, and the International Journal of Accounting and has presented research papers to audiences in several countries including the United States, New Zealand, Japan, Taiwan, Korea, and China.

Blocher/Stout/Cokins/Chen:

Clarity of vision and the proper perspective can often mean the difference between confusion and understanding. Viewed up close, the eye chart featured on the cover of Cost Management: A Strategic Emphasis appears like a normal examination tool. Taken at a distance, though, the message is clear. Bringing the big picture into focus is a guiding principle not only in this textbook, but also in the busi- ness of cost management. The function of cost accounting is to organize unclear data and use sound judgment to supply managers with useful and timely information. The goal of Cost Management is to provide cost accountants with the tools they need to make this happen.

Cost Management by Blocher, Stout, Cokins, and Chen uses a strategic emphasis to make the connec- tions between concepts and procedures clear to students. Making students see the relevance of cost management concepts and procedures, and demonstrating how they will use this information in the future, is a recurring theme of each chapter.

Once viewed simply as technical experts in accounting methods and procedures, accountants now play a critical role as participants on multifunctional management teams. Along with the important tradi- tional cost management methods and procedures, Cost Management provides a context for students by using a unique strategic framework. This organization helps students gain an understanding of how learning cost accounting techniques can better serve the company as a whole:

viii

Strategic Framework Part I: Introduction to Cost Management Part II: Planning and Decision Making The
Strategic
Framework
Part I: Introduction to Cost
Management
Part II: Planning and
Decision Making
The introductory chapters develop important strategic
Part II examines how cost
estimation, budgeting, and
concepts like strategy development and implementation,
the Value Chain, Cost Concepts, the Balanced Scorecard,
and Activity-Based Costing (ABC)
decision making help companies maintain a competitive
advantage
Part III: Process Costing and
Cost Allocation
Parts IV and V: Operational Control
and Management Control
Part III examines how process costing and cost
Parts IV and V examine performance measurement at the
allocation are used to determine product costs and to
evaluate a company’s operations
operational and managerial level, with the goal of linking
management incentives to strategy
Part VI: Advanced Topics in
Cost Management
Part VI examines three strategically important advanced
areas in cost management: executive compensation,
business valuation, and capital budgeting

Bringing the Big Picture into Focus for Your Students

REAL-WORLD FOCUS Commodities and Cost Leadership: PCs, Cell Phones, and Airlines A commodity is a
REAL-WORLD FOCUS
Commodities and Cost Leadership: PCs, Cell Phones,
and Airlines
A
commodity is a product or service that is difficult to differentiate and,
tain its growth in profits and sales by moving successfully into new
as
a result, becomes a natural for cost leadership competition. Exam-
markets (China) and product lines (television sets and digital music
ples include building materials, many consumer electronics products,
and many of the things we buy in supermarkets. Thomas L. Friedman,
award-winning columnist and author, has addressed the issue of com-
modities in the current business environment in his new book, The
World Is Flat. One reason the “world is flat” is because any product or
service that is a commodity will find its low-cost supply anywhere in
the world—wherever there is the lowest cost. Commenting on India’s
growth in outsourcing work from other countries, Friedman notes that
the portion of work that can be digitized is a good candidate for out-
sourcing. He provides examples from the accounting profession (tax
return preparation) and journalism (press releases, company reports);
these activities are being outsourced to the low-cost supplier. The ac-
countant or journalist instead provides value-adding services to the
customer (such as tax planning, financial analysis, and news analy-
sis). Some parts of the work are in effect “commoditized.”
Other examples of commodities include personal computers
(PCs), cell phones, and airlines. The PC industry, dominated by Dell
Computer, has seen sales rise while profits fall. Dell manages to main-
players).
As in the PC industry, where prices have fallen as product per-
formance has risen, prices and cost competition have increased in
the cell phone industry as new manufacturers have entered the mar-
ket and regulatory changes in the United States make it easier for
users to switch providers.
The airline industry continues to move in the direction of the low-
cost carriers, as shown by the trend by the carriers to charge for
once-free items such as pillows, meals, and headsets.
Source: Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-
First Century, Farrar, Straus, and Giroux, New York 2005; “Less Friendly Skies,”
BusinessWeek, July 11, 2005, p. 16; “Pricing Pressure Squeezes Cellphone
Makers World-Wide,” The Wall Street Journal, January 15, 2005, p. B1; “Dell
Effect Is under Strain as PC Maker Swells,” by Gary McWilliams, The Wall
Street Journal, August 17, 2005, p. C1; “For Dell, Success in China Tells Tale
of Maturing Market,” The Wall Street Journal, July 5, 2005, p. 1; “PC Makers:
More Sales, Fewer Profits,” BusinessWeek, September 3, 2003, pp. 46–47; Pete
Engardio, “The Future of Outsourcing,” BusinessWeek, January 30, 2006,
pp. 50–64.

To augment this coverage, the Blocher team encourages students to further explore real-world companies through

Cost Management in Action boxes. This feature

poses important questions that make students think critically about how cost accounting affects management strategy. The authors then supply their comments for the Cost Management in Action boxes at the end of each chapter.

Real-World Focus. All firms strive to have a competitive edge—for some it may be low cost, for others it might be high quality or unique product features. Cost Management, 4e teaches how accounting systems can add value to the organization by providing relevant data for planning, control, and decision-making. The Real-World Focus boxes take real companies and demonstrate strategy in action.

Cost Management in Action

A Case in Competitive Strategy:

Wal-Mart and Target

Wal-Mart and Target are two of the most successful retailers in the United States Wal-Mart bears the slogan, “Always Low Prices,” while Target stores say “Expect More, Pay Less.” If you have shopped at either of these stores you will likely have formed an opinion about the stores and how they compete.

Required

1. Based on your experience, explain what you think are the competitive strategies of these retailers. Are they key competitors, targeting the same customers? Do you think each firm has adopted the most effec- tive strategy? Why or why not?

2. Recently Wal-Mart has begun to advertise in the high-fashion maga- zine Vogue. How does this fit the firm’s strategy, or does it?

3. While customer’s are pleased with Wal-Mart’s low prices, there is ongoing controversy about the firm’s negative effect on other retail- ers where Wal-Marts are located. For example, the closing of 30 su- permarkets in Oklahoma City in recent years has been attributed to

Wal-Mart’s arrival. What are your thoughts on the controversy? Are

the ethical principles and standards of the management accountant relevant in this context?

In areas related to the management accounting function, the Financial Executives Institute (FEI) provides services much like those provided by the IMA for financial managers, includ- ing controllers and treasurers. Because one of the management control responsibilities of the management accountant is to develop effective systems to detect and prevent errors and fraud in the accounting records, the management accountant commonly has strong ties to the control-oriented organizations such as the Institute of Internal Auditors (IIA).

Even if you’re on the right track, you’ll get run over if you just sit there.

Will Rogers

Problem Material. The Blocher team has taken great care to develop problems and cases that effectively demonstrate the strategic issues presented in each chapter. Included is a variety of exercises and problems that deal with strategic, international, service, and ethics issues. All problems are marked appropriately for easy identification, including problems that require the use of Excel:

including problems that require the use of Excel: Strategy International S e r v i c

Strategy

including problems that require the use of Excel: Strategy International S e r v i c

International

that require the use of Excel: Strategy International S e r v i c e Ethics

Service

the use of Excel: Strategy International S e r v i c e Ethics Excel Clear

Ethics

of Excel: Strategy International S e r v i c e Ethics Excel Clear and concise
of Excel: Strategy International S e r v i c e Ethics Excel Clear and concise

Excel

Clear and concise exhibits help illustrate basic and complicated topics throughout the book.

packers work full-time on that jacket, the firm could manufacture only 36,000 units o because of limited capacity on the sewing machine. The production planner can determine the best production mix by examining all of th

sible production possibilities in the darker shaded area, from 36,000 on the Gale axis to

A where the constraints intersect, and then to the point 22,400 on the Windy axis. The

mix with the highest contribution must be one of these three points: 36,000 of Gale, po

or 22,400 units of Windy. The solution, called the corner point analysis, is obtained by fi

EXHIBIT 9.22

Windbreakers Production and Sales Possibilities Two Production Constraints— Sewing Machine and Inspection

the total contribution at each point and then choosing the point with the highest contrib
the total contribution at each point and then choosing the point with the highest contrib
67,200
Production constraint for inspection and packaging
Production constraint for sewing machine
36,000
A (4,800 Gale, 20,800 Windy)
24,000
22,400
Units of Sales for Windy
Units of Sales for Gale

The supplemental Cases and Readings manual challenges students to think about and use cost management information in a real-world setting. The longer articles in the manual help integrate case studies and articles into more detailed discussions about cost management.

articles in the manual help integrate case studies and articles into more detailed discussions about cost

What’s NEW about the 4th edition of

In this edition, the authors made extensive changes to nearly every chapter. They increased focus on the strategic role of cost management, both in the text and in the exercises and problems for each chapter. Careful revisions were made in each chapter to enhance the clarity and exposition, with the goal of presenting the content in a student-friendly manner. Numerous Real-World Focus items were added or revised in each chapter, along with additional Cost Management in Action boxes. The Blocher team also made these critical changes for this edition:

New brief exercises (10–12 per chapter) provide

a

valuable resource for the instructor to ask short

questions, most of which require a short calculation. These can be used to assess student preparation of the material or to begin the class discussion with some focused questions on the chapter material. In contrast to the questions, the brief exercises focus on calculation; in contrast to the exercises, brief exercises can be used in class without prior assignment to the students.

A

new supplement, the Excel Solutions Manual, is

provided for all end-of-chapter problems and exercises. This manual is provided in two versions: an instructor version (containing both data inputs and solutions) and a student version (containing data inputs only). Instructors now have the flexibility to make assignments

where students prepare Excel solutions to any exercise or problem in the text. Because all input data are provided to students, data-entry errors on the part

of students are minimized—all students begin each

spreadsheet assignment with the same set of data. At the instructor’s discretion, completed spreadsheets can be printed or posted to the Web for access by students.

A significantly enhanced Test Bank features new

multiple-choice questions and problems linked to

learning objectives and level of difficulty.

New cases are provided for use with the activity-based casting software of SAS Institute; improvements in the tutorials and materials have been made for increased ease-of-use, by students and instructors alike.

Chapter 1

• New Real-World Focus examples, including surveys of current practice

• Update of section on ethics for new IMA Code of Professional Conduct

• New self-study question, and new exercises and problems focusing on strategy and on ethics

Chapter 2

• New Real-World Focus examples, including surveys of current practice

• Enhanced material on implementing the balanced scorecard (BSC)

• New exercises and problems with an emphasis on strategy and the balanced scorecard

Chapter 3

• Clarification of the discussion on cost drivers

• Coverage of risk preferences removed from Chapter 3 and now enhanced in Chapter 17

• New Real-World Focus examples, including an extensive example of cost terms used in agriculture

• New discussion of the cost of capacity

• New exercises and problems

Chapter 4

• Coverage of departmental overhead rates moved from Chapter 5; related exercise and problem material added on departmental overhead rates

• Clarification of accounting for normal spoilage with the addition of an example in the text

• New Real-World Focus examples

• New exercises and problems with a focus on service industries

Chapter 5

• Significant revision to shorten and focus this chapter; customer profitability analysis has been shortened and is now more focused

• Coverage of departmental overhead rates is moved to Chapter 4; learning objectives are condensed and focused;

the strategic role of ABC/M is enhanced and moved to the front of the chapter

• All new illustrations in the text, including examples in service and governmental organizations

• New exhibits to clarify the two-stage procedure under volume-based and activity-based costing

• Several new Real-World Focus examples, including surveys of current practice

• New coverage of the cost of capacity and the role of ABC costing in managing the cost of capacity

• Several new exercises and problems, with a focus on the cost of capacity

• New exercises and problems that include resource-consumption as well as activity-consumption cost drivers

• New coverage of time-driven ABC costing

• New coverage of multiple-activity ABC costing

• New exercises and problems focusing on strategy, the cost of capacity, resource consumption cost drivers, and ethics

Cost Management?

David E. Stout has joined the Blocher author team for the fourth edition. Dr. Stout
David E. Stout has joined the Blocher author team for the fourth edition. Dr. Stout brings years of teaching experience
at Rider University, Villanova University, and most recently Youngstown State University, to this new edition.
David earned his PhD degree (1982) from the University of Pittsburgh and teaches primarily in the cost/managerial
accounting area.

Chapter 6

• New discussion of simple vs. multiple linear regression

• New coverage of time-series vs. cross-sectional regression

• Several new Real-World Focus examples

• Expanded coverage of the learning curve, with discussion of the general learning model

• New exercises and problems with a focus on interpreting regression results, including those from cross- sectional regression analysis

Chapter 7

• Notation is clarified and changed to closely correspond with symbols used in Chapter 6

• New Real-World Focus examples

• New problems and examples

• Expanded coverage of Excel’s Goal Seek option for conducting sensitivity analysis

• Clarification of the coverage of activity-based CVP and multiple- product CVP

Chapter 8

• Completely new set of Real-World Focus examples

• Additional end-of-chapter material dealing with ethical considerations, budgeting for not-for-profit organizations, and sensitivity analysis

• Explicit linkage to financial accounting (accounting for sales discounts)

• Inclusion of additional Excel-based assignments

Chapter 9

• Updated Real-World Focus examples

• New exercises and problems with a focus on strategy and on applications in the service industries

Chapter 10

• New coverage of quality function deployment (QFD), including several illustrations

• New and updated Real-World Focus examples

• New exercises and problems with a focus on strategy and on service industries

• Additional coverage of Takt time with a new illustration and problem material

Chapter 11

• Additional coverage of backflush costing with a new illustration and problem material

• New problem material with a focus on service industries

Chapter 12

• New Real-World Focus examples

• New problems

Chapter 13

• Expanded introductory discussion of control systems in general and operational control systems in particular

• Expanded discussion of the difference between standard costs and a standard cost system

• Presentation of a general model for analyzing variable cost variances (Exhibit 13.7)

• Broader mix of end-of-chapter assignment material (including additional Excel-based assignments, ethics, and behavioral considerations)

• Movement of journal-entry material to an appendix

Chapter 14

• New discussion of the difference between the product-costing and control purposes of standard costs for factory overhead

• Expanded discussion of the variance- disposition question

• New diagrammatical approach for overhead variance analysis (Exhibits 14.4 and 14.5), and associated end-of- chapter assignment material

• New alternative diagrammatical approach for overhead variance analysis (Exhibit 14.18)

• Expanded set of Excel-based end-of- chapter assignment material

• Significant expansion of Real-World Focus items

Chapter 15

• Significant revision including new material and a new focus on the flexible budget; the chapter is now integrated into the flexible budget concept used in the prior two chapters, and there is a new emphasis on the strategic role of the analysis of sales performance and productivity

• The coverage of strategic profitability analysis has been removed and replaced by a framework that is consistent with the flexible budget approach

• Duplication between Chapters 15 and 13 removed for the new edition

• New Real-World Focus examples

• New end-of-chapter exercise and problem material with a focus on the application of the flexible budget concept in the analysis of productivity and sales performance

Chapter 16

• Development of a comprehensive framework (Exhibit 16.3) for managing and controlling quality, which is used to anchor the discussion of all topics covered in the chapter

New discussion regarding the role of management accounting in the management and control of quality

• Expanded discussion of nonfinancial performance indicators

• New discussion of Six Sigma, including implementation issues and the application of Six Sigma to the accounting/finance function

• Many new Real-World Focus items

• New discussion of the application of COQ to environmental quality

• Greatly expanded mix of end-of- chapter assignment material

• Repositioning of Taguchi loss function analysis to an appendix

Chapter 17

• Coverage of risk preferences repositioned to this chapter from Chapter 3; this material, including related assignment material, has been updated and enhanced

• New and updated Real-World Focus examples, including surveys from practice

• New coverage of the role of strategy in the determination of the cost, profit, or revenue SBU, with new exhibit to illustrate the differences across these responsibility units

• Extended coverage of the implementation of the balanced scorecard (BSC) for performance measurement

Chapter 18

• New coverage and illustration of the relationship between the components of return on assets: return on sales and asset turnover

• New Real-World Focus examples

• New exercises and problems with a focus on economic profit, residual income, and EVA ®

• New coverage of intangible assets and the use of ROA for innovative companies

Chapter 19

• New and updated Real-World Focus examples, including surveys from practice

• Updated discussion of reporting requirements for stock options

• Significant revision of the coverage on business valuation; new focus on determining the market value of equity

• Expanded coverage of the discounted cash flow method (DCF) for valuing a firm

Chapter 20

• Expanded discussion of the strategic role of capital budgeting

• New discussion of the role of the management accountant in the capital budgeting process

• Reference to the analytic hierarchy process (AHP) in conjunction with the capital budgeting process

• Consistent with the revisions in Chapter 19, reorientation of material to provide greater focus on discounted cash flow (DCF) decision models

• Expanded discussion of the calculation of the weighted-average cost of capital (WACC)

• Many new Real-World Focus examples pertaining to the capital budgeting process

New discussion regarding sensitivity analysis

• Integration of Excel-based financial formulas for solving capital budgeting problems

• Advanced issues in capital budgeting analysis are repositioned to an appendix

• Expanded discussion of behavioral considerations associated with the capital-budgeting process

Supplements

For Instructors…

Instructor’s Resource CD-ROM (ISBN 0073128163): Contains all essential course supplements such as the Instructor’s Resource Manual, Solutions Manual, Test Bank Word Files, Diploma Test Bank, PowerPoint ® Presentations, and Excel Solutions Manual. All instructor supplements are prepared by the authors.

All instructor supplements are prepared by the authors. Online Learning Center: www.mhhe.com/blocher4e. The

Online Learning Center: www.mhhe.com/blocher4e.

The Instructor Edition of the Cost Management: A Strategic Emphasis, 4e OLC is password-protected and another convenient place for instructors to access course supplements. Resources for professors include: the Instructor and Student Solutions Manual, transparency masters, teaching notes for the casebook, links to professional resources, sample syllabi, text updates, solutions to the Instructor and Student Excel Spreadsheets, and solutions to Internet exercises.

For Students…

and solutions to Internet exercises. For Students… Cases and Readings for use with Cost Management: A
and solutions to Internet exercises. For Students… Cases and Readings for use with Cost Management: A
and solutions to Internet exercises. For Students… Cases and Readings for use with Cost Management: A

Cases and Readings for use with Cost Management: A Strategic

Emphasis, 4e (ISBN 0073128198): This manual contains an extensive set of longer cases covering a variety of important topics. These case scenarios put students in situations that allow them to think strategically and to apply concepts they’ve learned in the course. Key readings have been chosen to give students more background into the evolution of strategic cost management topics.

Study Guide (ISBN 0073128171): Prepared by Roger Doost (Clemson University), the Study Guide reviews the highlights of each chapter in Cost Management: A Strategic Emphasis, 4e and includes a variety of self-study questions for student review. Every chapter includes short-answer questions organized by learning objective, multiple-choice questions, and thorough exercises. Suggested answers to all questions and exercises are included.

Online Learning Center: www.mhhe.com/blocher4e. The Student

Edition of the Cost Management: A Strategic Emphasis, 4e OLC contains many tools designed to help students study including: check figures, text updates, links to professional resources, chapter overviews, chapter objectives, multiple-choice quizzes, flashcard key term review, Internet exercises, Excel spreadsheets with data only (for use by students with Excel assignments), and PowerPoint® presentations.

SAS Software: SAS’s Activity-Based Costing (ABC) software is used worldwide for performance management functions and analysis. Cost Management fully incorporates SAS Software in its case material to prepare students for calculating ABC costs, creating cost driver assignments, and organizing cost information in an electronic environment. Visit the Blocher OLC today to learn more!

Acknowledgments

Our Sincerest Thanks In writing this book, we were fortunate to have received extensive feedback from a number of accounting educators. We want to thank our colleagues for their careful and complete review of our work. The comments that we received were invaluable in helping us to shape the manu- script. We believe that this collaborative development process helped us to create a text that will truly meet the needs of today’s students and instructors. We are sincerely grateful to the following individuals for their participation in the process:

Reviewers for 4e:

Stephen Makar, University of Wisconsin–Oshkosh Michael Flores, Wichita State University Jay D. Forsyth, Central Washington University Jay Holmen, University of Wisconsin–Eau Claire Jennifer Niece, Assumption College David R. Honodel, University of Denver Dennis Caplan, Oregon State University David Eichelberger, Austin Peay State University Jerry W. Ferry, University of North Alabama Laurie B. McWhorter, Mississippi State University Randall E. LaSalle, West Chester University of Pennsylvania Vidya N. Awasthi, Seattle University Bambi Hora, University of Central Oklahoma Jerry Thorne, North Carolina A&T State University

Olen L. Greer, Southwest Missouri State University Marvin L. Bouillon, Iowa State University Bea Chiang, The College of New Jersey Alan B. Czyzewski, Indiana State University Judith A. Harris, Nova Southeastern University Aleecia Hibbets, University of Louisiana–Monroe Sanford R. Kahn, University of Cincinnati Mehmet C. Kocakulah, University of Southern Indiana Laura Jean Kreissl, University of Wisconsin–Parkside Dan Law, Gonzaga University Brian L. McGuire, University of Southern Alabama Yaw M. Mensah, Rutgers University Kenneth P. Sinclair, Lehigh University Larry N. Killough, Virginia Polytechnic Institute and State University Sandra S. Lang, McKendree College Mike Grayson, Jackson State University

Acknowledgments

xv

Previous Edition Reviewers:

K.R. Balachandran, New York University Mohamed E. Bayou, School of Management–University of Michigan–Dearborn Wayne Bremser, Villanova University Robert J. DePasquale, Saint Vincent College Robert W. Duron, Chadron State College Donald C. Gribbin, Southern Illinois University Linda Holmes, University of Wisconsin–Whitewater Norma C. Holter, Towson University Paul Juras, Wake Forest University

We also want to recognize the special efforts of:

Daniel Flaningan Keith Folken Kristin Hawkins Taylor Henry Jessie Kinsley Andrew Stulce Finally, we are most appreciative of the outstanding assistance and support provided by the professionals of McGraw-Hill/Irwin: Stewart Mattson, our editorial director, and Tim Ve rt ovec, Executive Editor, for their guidance; our developmental editor, Daryl Horrocks, for his invaluable suggestions; Krista Bettino, our marketing manager, for her significant promo- tional efforts; Bruce Gin, our project manager, for his attention to detail; Cara David, for the outstanding presentation of the text; Ira Roberts, our supplements coordinator, for his timeli- ness and accuracy in delivering the support material; and Victor Chiu, our media producer, and Matthew Perry, our media project manager, for their technical expertise in delivering our multimedia material. An added thanks to Beth Woods and Alice Sineath for their significant contributions to the accuracy of our text.

Ed Blocher

David E. Stout

Gary Cokins

K ung Chen

Brian L. McGuire, University of Southern Indiana Cheryl E. Mitchem, Virginia State University Margaret O’Reilly-Allen, Rider University Chei M. Paik, George Washington University Hugh Pforsich, University of Idaho Shirley Polejewski, University of St. Thomas Jenice Prather-Kinsey, University of Missouri–Columbia Dennis Shanholtzer, Metropolitan State University John L. Stancil, Florida Southern College Ronald A. Stunda, Birmingham-Southern College

Brief Contents

PART ONE

Introduction to Cost Management

2

1 Cost Management and Strategy:

An Overview

2

2 Implementing Strategy: The Balanced

Scorecard and the Value Chain

30

3 Basic Cost Management Concepts

4

5 Activity-Based Costing and Management

54

Job Costing

84

PART TWO

Planning and Decision Making

170

120

6

Cost Estimation

170

7

Cost-Volume-Profit Analysis 218

 

8

Strategy and the Master Budget

254

9

Decision Making with Relevant Costs

and a Strategic Emphasis

316

10

Cost Planning for the Product Life Cycle:

Target Costing, Theory of Constraints,

and Strategic Pricing

360

PART THREE

Process Costing and Cost Allocation

404

11 Process Costing

12 Cost Allocation: Service Departments and Joint

404

Product Costs

454

PART FOUR

Operational Control

13 The Flexible Budget and Standard Costing:

494

Direct Materials and Direct Labor

14 The Flexible Budget: Factory Overhead

15 The Flexible Budget: Further Analysis of

494

Productivity and Sales

610

550

16

The Management and Control of Quality

648

PART FIVE

Management Control

698

17 Management Control and Strategic

Performance Measurement

698

18 Strategic Investment Units and Transfer

Pricing

742

PART SIX

Advanced Topics in Cost Management

19 Management Compensation, Business Analysis,

784

and Business Valuation

784

20 Capital Budgeting

818

PRESENT VALUE TABLES GLOSSARY 872 INDEX 882

870

Contents

PART ONE

INTRODUCTION TO COST

MANAGEMENT

Chapter 1 Cost Management and Strategy:

2

An Overview

2

Problems 26 Solution to Self-Study Problem

29

Chapter 2 Implementing Strategy: The Balanced

Scorecard and the Value Chain

30

Strengths-Weaknesses-Opportunities-Threats (SWOT)

The Uses of Cost Management

3

Analysis

31

The Four Functions of Management

4

Execution

33

Strategic Management and Strategic Cost Management

6

Value-Chain Analysis

35

Types of Organizations

6

Value-Chain Analysis in Computer Manufacturing

37

The Contemporary Business Environment

7

The Balanced Scorecard

38

The Global Business Environment

7

The Balanced Scorecard Reflects Strategy

39

Manufacturing Technologies 8

The Strategy Map

40

The New Economy: Use of Information Technology,

Expanding the Balanced Scorecard Sustainability

42

the Internet, and E-Commerce

8

 

Summary 43

Focus on the Customer

8

Key Terms 43

Management Organization

Social, Political, and Cultural Considerations

9

The Strategic Focus of Cost Management Contemporary Management Techniques 10

10

Benchmarking 10 Total Quality Management

Business Process Improvement

Activity-Based Costing and Management Reengineering 11

11

11

11

The Theory of Constraints

11

9

Comments on Cost Management in Action

Self-Study Problems Questions 44

Brief Exercises

Exercises 45 Problems 45 Solutions to Self-Study Problems

44

45

52

43

Chapter 3 Basic Cost Management Concepts

54

Mass Customization

12

Cost Drivers, Cost Pools, and Cost Objects

55

Target Costing

12

Cost Assignment and Cost Allocation: Direct and Indirect

Life-Cycle Costing

12

Costs 55

The Value Chain 12

Cost Drivers and Cost Behavior

58

The Balanced Scorecard

12

Activity-Based Cost Drivers

58

How a Firm Succeeds: The Competitive Strategy

13

Volume-Based Cost Drivers

59

Strategic Measures of Success

14

Developing a Competitive Strategy: Strategic Positioning 15

Cost Leadership

Differentiation 16 Other Strategic Issues

15

16

The Professional Environment of Cost Management

17

Structural and Executional Cost Drivers

63

Cost Concepts for Product and Service Costing

64

Cost Accounting for Products and Services

Product Costs and Period Costs

Manufacturing, Merchandising, and Service Costing

64

64

Cost Concepts for Planning and Decision Making

Relevant Cost

68

65

68

Professional Organizations

17

Attributes of Cost Information for Decision Making

69

Professional Certifications

19

Cost Concepts for Management and Operational

Professional Ethics

20

Control 70

Summary 21 Appendix A: More about Strategy Key Terms 23

Comments on Cost Management in Action

22

23

Controllability

70

Summary

Key Terms

Comments on Cost Management in Action

70

71

71

Self-Study Problem

24

Self-Study Problem

71

Questions 24

Questions 72

Brief Exercises

25

Brief Exercises

72

Exercises 25

Exercises 73

xvii

xviii

Contents

Problems 78 Solution to Self-Study Problem

82

Chapter 4 Job Costing

Product Costing Systems

84

84

Cost Accumulation: Job or Process Costing?

Cost Measurement: Actual, Normal, or Standard Costing

Overhead Assignment under Normal Costing: Volume-Based or Activity-Based? 85

85

85

The Strategic Role of Product Costing

Job Costing: The Cost Flows

86

86

Direct Materials Costs

87

Direct Labor Costs

89

Factory Overhead Costs

91

Actual Costing

91

Normal Costing

91

The Application of Factory Overhead in Normal Costing 93

Cost Drivers for Factory Overhead Application

93

Applying Factory Overhead Costs

Departmental Overhead Rates

Disposition of Underapplied and Overapplied Overhead

93

94

96

Job Costing in Service Industries 97 Operation Costing 98 Summary 100 Appendix A: Spoilage, Rework, and Scrap in Job Costing 101 Key Terms 103 Comments on Cost Management in Action 103 Self-Study Problem 103 Questions 104 Brief Exercises 104 Exercises 105 Problems 108 Solution to Self-Study Problem 118

Chapter 5 Activity-Based Costing

and Management

120

The Strategic Role of Activity-Based Costing

Role of Volume-Based Costing

121

120

Activity-Based Management

130

What Is Activity-Based Management?

Activity Analysis

131

130

Value-Added Analysis 131

Activity-Based Costing/Management (ABC/M) Applications 133

ABC/M in Manufacturing: Industrial Air Conditioner Units 133

ABC/M Application in the Service Industry: A Retirement

and Assisted Living Community

ABC/M Applications in Government

135

136

Customer Profitability Analysis

138

Customer Cost Analysis

Customer Profitability Analysis

Customer Value Assessment

139

141

140

Implementation Issues

142

Multiple-Stage Activity-Based Costing Time-Driven Activity-Based Costing

143

143

Summary 144 Key Terms 144 Comments on Cost Management in Action 145 Self-Study Problem 145 Questions 146 Brief Exercises 146 Exercises 147 Problems 153 Solution to Self-Study Problem 167

PART TWO

PLANNING AND DECISION MAKING

Chapter 6 Cost Estimation

Strategic Role of Cost Estimation

170

170

170

Using Cost Estimation to Predict Future Costs

171

Using Cost Estimation to Identify Cost Drivers

171

Six Steps of Cost Estimation

172

Step 1: Define the Cost Object to Be Estimated

172

Step 2: Determine the Cost Drivers

Step 3: Collect Consistent and Accurate Data

Step 4: Graph the Data

172

172

172

Activity-Based Costing

122

Step 5: Select and Employ the Estimation Method

173

Resources, Activities, Resource Consumption Cost Drivers,

Step 6: Assess the Accuracy of the Cost Estimation

173

and Activity Consumption Cost Drivers

What Is Activity-Based Costing?

122

122

Cost Estimation Methods

173

An Illustration of Cost Estimation

173

The Two-Stage Cost Assignment Procedure 123

High-Low Method

173

Steps in Developing an Activity-Based Costing System

124

Wo rk Measurement

176

Step 1: Identify Resource Costs and Activities

Step 2: Assign Resource Costs to Activities Step 3: Assign Activity Costs to Cost Objects

124

125

126

Benefits and Limitations of Activity-Based Costing

Benefits

126

126

Regression Analysis 176 Using Spreadsheet Software for Regression Analysis

Data Requirements and Implementation Problems

Data Accuracy

Selecting the Time Period

183

183

182

183

Limitations

127

Nonlinearity Problems

184

A Comparison of Volume-Based and Activity-Based

Summary

185

Costing 128

Appendix A:

Learning Curve Analysis

186

Volume-Based Costing

128

Appendix B:

Regression Analysis

189

Activity-Based Costing

129

Key Terms

195

Contents

xix

Comments on Cost Management in Action

195

Master Budget

263

Self-Study Problem

196

Sales Budget

263

Questions 197

Manufacturing Budgets

265

Brief Exercises

198

Merchandise Purchases Budget

269

Exercises 199 Problems 202 Solutions to Self-Study Problems

214

Chapter 7 Cost-Volume-Profit Analysis

Cost-Volume-Profit Analysis

218

218

Contribution Margin and Contribution Income Statement

Strategic Role of CVP Analysis

CVP Analysis for Breakeven Planning

220

222

Equation Method: For Breakeven in Units

Equation Method: For Breakeven in Dollars

Contribution Margin Method

223

CVP Analysis for Profit Planning

225

222

222

Revenue Planning

Cost Planning

Including Income Taxes in CVP Analysis

225

225

228

CVP Analysis for Activity-Based Costing 229

Sensitivity Analysis of CVP Results

231

What-If Analysis of Sales: Contribution Margin

and Contribution Margin Ratio

Margin of Safety

Operating Leverage

231

231

232

CVP Analysis with Two or More Products

234

219

CVP Analysis for Not-for-Profit Organizations

236

Assumptions and Limitations of CVP Analysis

236

Linearity and the Relevant Range

Identifying Fixed and Variable Costs for CVP Analysis

236

236

Summary 238 Key Terms 239 Comments on Cost Management in Action 239 Self-Study Problem 239 Questions 239 Brief Exercises 240 Exercises 240 Problems 242 Solution to Self-Study Problem 253

Chapter 8 Strategy and the Master Budget

Role of Budgets

Strategy, the Long-Term Plan, and the Master Budget 256

255

256

Formulation of Strategy

Strategic Goals and Long-Term Objectives

Importance of Strategy in Budgeting

258

258

Short-Term Objectives and the Master Budget

Budgeting Process

260

258

254

Selling and General Administrative Expense Budget

Cash Receipts (Collections) Budget

Cash Budget

Budgeted Income Statement

Budgeted Balance Sheet

272

272

274

274

271

Budgeting in Service Companies and International Firms,

and Not-for-Profit Organizations

276

Budgeting in Service Industries

Budgeting in Not-for-Profit Organizations

Budgeting in International Settings

276

278

Alternative Budgeting Approaches

279

278

Zero-Base Budgeting (ZBB)

Activity-Based Budgeting (ABB)

Kaizen (Continuous Improvement) Budgeting

279

280

281

Computer Software in Budgeting and Planning

Ethical and Behavioral Issues in Budgeting

284

Ethics in Budgeting Goal Congruence

Difficulty Level of the Budget Target

Authoritative or Participative Budgeting?

Role of the Budget Department or Controller

284

284

285

286

286

Summary

Key Terms

Comments on Cost Management in Action 287 Self-Study Problems 288 Questions 289 Brief Exercises 290 Exercises 291 Problems 299

Solutions to Self-Study Problems

287

287

313

282

Chapter 9 Decision Making with Relevant Costs

and a Strategic Emphasis

The Decision-Making Process Relevant Cost Analysis 318

316

317

Relevant Cost Information

318

Batch-Level Cost Drivers

319

Fixed Costs and Depreciation

Other Relevant Information: Opportunity Costs

320

Strategic Cost Analysis Special-Order Decisions

321

322

Cost Analysis

Strategic Analysis

322

323

Is TTS Now Operating at Full Capacity?

Excessive Relevant Cost Pricing

Other Important Factors

324

325

323

320

Budget Committee

260

Make, Lease, or Buy Decision

325

Budget Period

261

Cost Analysis

325

Budget Guidelines

262

Strategic Analysis

327

Initial Budget Proposal

Negotiation, Review, and Approval

Revision

262

263

262

Sell Before or After Additional Processing

Cost Analysis

Strategic Analysis

327

328

327

xx

Contents

Profitability Analysis

329

Questions 385

Profitability Analysis: Keep or Drop a Product Line

329

Brief Exercises

385

Strategic Analysis

330

Profitability Analysis: Evaluating Programs

331

Profitability Analysis: Service and Not-for-Profit Organizations 331 Multiple Products and Limited Resources 332

Case 1: One Production Constraint

332

Case 2: Two or More Production Constraints Behavioral and Implementation Issues 335

333

Consideration of Strategic Objectives

Predatory Pricing

Replacement of Variable Costs with Fixed Costs

Proper Identification of Relevant Factors

335

335

336

336

Summary 337 Appendix A: Linear Programming and the Product Mix Decision 337 Key Terms 340 Comments on Cost Management in Action 340 Self-Study Problems 340 Questions 341 Brief Exercises 341 Exercises 342

Problems 346 Solutions to Self-Study Problems 358

Chapter 10 Cost Planning for the Product Life

Cycle: Target Costing, Theory of Constraints,

and Strategic Pricing

360

Target Costing

362

Value Engineering

Target Costing and Kaizen

363

365

An Illustration: Target Costing in Health Product

Manufacturing 366

An Illustration Using Quality Function Deployment (QFD)

Benefits of Target Costing

The Theory of Constraints

368

369

367

The Use of the Theory of Constraints Analysis in Health

Product Manufacturing

Steps in the Theory of Constraints Analysis

Theory of Constraints Reports

Activity-Based Costing and the Theory of Constraints

370

370

375

Life-Cycle Costing

376

375

The Importance of Design

The Use of Life-Cycle Costing in a Software Firm

377

Strategic Pricing Using the Product Life Cycle

378

379

Pricing Using the Cost Life Cycle

Strategic Pricing for Phases of the Sales Life Cycle

The Use of the Sales Life Cycle in Computer Manufacturing 381

Summary 382 Appendix A: Using the Flow Diagram to Identify Constraints 382 Key Terms 384 Comments on Cost Management in Action 384 Self-Study Problem 384

379

381

Exercises 386 Problems 391 Solution to Self-Study Problem

PART THREE

PROCESS COSTING AND COST ALLOCATION 404

Chapter 11 Process Costing

Characteristics of Process Costing Systems

401

404

Equivalent Units

Flow of Costs in Process Costing

Steps in Process Costing Process Costing Methods

405

407

408

406

Illustration of Process Costing

408

Weighted-Average Method

409

First-In, First-Out (FIFO) Method

412

405

Comparison of Weighted-Average and FIFO Methods

419

Process Costing with Multiple Departments

419

Transferred-In Costs

420

Weighted-Average Method

420

The FIFO Method

422

Journal Entries for Process Costing

425

Implementation and Enhancement of Process Costing

426

Activity-Based Costing and the Theory of Constraints

Just-in-Time Systems and Backflush Costing

427

Summary 428

Appendix A: Spoilage in Process Costing 428 Key Terms 432 Comments on Cost Management in Action 432 Self-Study Problems 432 Questions 433 Brief Exercises 434 Exercises 434 Problems 437

Solutions to Self-Study Problems

448

426

Chapter 12 Cost Allocation: Service Departments

and Joint Product Costs

454

The Strategic Role of Cost Allocation

455

The Ethical Issues of Cost Allocation

456

Cost Allocation to Service and Production Departments 456

Departmental Approach

457

Cost Allocation in Service Industries

Joint Product Costing

470

468

Methods for Allocating Joint Costs to Joint Products

471

Summary 475 Appendix A: By-Product Costing 475 Key Terms 478 Comments on Cost Management in Action 478 Self-Study Problem 478 Questions 478

Contents

xxi

Brief Exercises

479

Fixed Overhead Cost Analysis

555

Exercises 480

Interpretation of Fixed Factory Overhead Variances

558

Problems 481

Alternative Analyses of Factory Overhead Variances

559

Solution to Self-Study Problem

492

Summary of Factory Overhead Variances

561

PART FOUR

OPERATIONAL CONTROL

494

Chapter 13 The Flexible Budget and Standard Costing: Direct Materials and Direct Labor

Management Accounting and Control Systems

Evaluating Operating Performance

495

Effectiveness

Standard Costs

495

497

Standard Costs versus a Standard Cost System

Types of Standards

Selection of Standards Sources of Standards

498

499

499

495

497

Standard-Setting Procedures

501

Establishing Standard Costs

501

Standard Cost Sheet

502

Flexible Budgets and Operational Control

The Flexible Budget

504

Assessing Efficiency

505

504

Breakdown of the Total Flexible Budget Variance

Selling Price Variance 508 Variable Cost Flexible Budget Variances

Further Analysis of the Total Variable Cost Flexible Budget Variance 509

507

508

494

General Model for Analysis of Variable Cost Variances 509

Direct Materials Variances 510 Direct Labor Variances 513 Timing of Variance Recognition

Effect of the New Manufacturing Technology

515

516

Behavioral and Implementation Issues

Summary 517 Appendix A: Recording Cost Flows and Variances

in a Standard Cost System Key Terms 522

Comments on Cost Management in Action

Self-Study Problems Questions 524

Brief Exercises

Exercises 526 Problems 534 Solutions to Self-Study Problems

516

519

522

523

525

547

Chapter 14 The Flexible Budget: Factory Overhead 550

Standard Overhead Costs: Planning versus Control

Variance Analysis for Factory Overhead Costs

Variable Overhead Cost Analysis

552

552

551

Interpretation and Implications of Variable Overhead Variances 554

Recording Standard Factory Overhead Costs

562

Journal Entries and Variances for Factory Overhead Costs 562

Variance Disposition

563

Standard Costs in Service Organizations

Overhead Variances in ABC Systems

565

568

ABC-Based Flexible Budgets for Control

Investigation of Variances

572

569

Type of Standard

Expectations of the Organization

Magnitude, Pattern, and Impact of a Variance

Causes and Controllability

Company Practices

572

572

573

576

572

Summary 576 Appendix A: Variance Investigation Decisions Under Uncertainty 578 Key Terms 580 Comments on Cost Management in Action 580 Self-Study Problems 581 Questions 582 Brief Exercises 583 Exercises 583 Problems 593 Solutions to Self-Study Problems 606

Chapter 15 The Flexible Budget: Further Analysis

of Productivity and Sales

610

The Strategic Role of the Flexible Budget in Analyzing

Sales and Productivity Analyzing Productivity

Sales and Productivity Analyzing Productivity

610

612

Partial Productivity

613

Total Productivity

618

Analyzing Sales: Comparison with the Master Budget 619

Sales Volume Variance Decomposed: Sales Quantity

and Sales Mix Variances

Sales Quantity Variance Decomposed: Market Size

and Market Share Variances

620

624

Analyzing Sales: Comparison with Prior Year Results 627

Analysis of Selling Price and Volume Variances

Analysis of Mix and Quantity Variances Analysis of Variable Cost Variances 629

629

628

Summary 630 Key Terms 631 Comments on Cost Management in Action 631 Self-Study Problems 631 Questions 632 Brief Exercises 633 Exercises 634 Problems 636 Solutions to Self-Study Problems 634

xxii

Contents

Chapter 16 The Management and Control

of Quality

648

The Strategic Importance of Quality

649

Baldrige Quality Award 649

ISO 9000 and ISO 14000

Quality and Profitability: Conceptual Linkage

Empirical Evidence—Does TQM Matter?

649

651

650

Accounting’s Role in the Management and Control of Quality 652

Chapter Preview

652

Total Quality Management (TQM)

652

The Meaning of Quality

Characteristics of Total Quality Management

The Need for a New Accounting System

652

654

654

Comprehensive Framework for Managing and Controlling Quality 654

Knowledge of Business Processes

654

Role of the Customer

655

Financial Component

656

Nonfinancial Performance Indicators

Feedback Loops

Relevant Cost Analysis 656

Link to Operations Management

Breadth of the System

656

656

656

Setting Quality-Related Expectations

656

657

Setting Quality Expectations: A Six Sigma Approach

Setting Quality Expectations: Goalpost versus Absolute

657

Conformance Standards

659

Goalpost Conformance

659

Absolute Quality Conformance

660

Goalpost or Absolute Conformance?

660

Financial Measures and Costs of Quality

661

Relevant Cost Analysis 661

Cost of Quality (COQ) Reporting

Quality Cost Reports

Data Definition, Sources, and Collection

Report Format

Illustration of a Cost of Quality Report

COQ and Activity-Based Costing (ABC)

662

664

665

Nonfinancial Quality Indicators

666

664

665

666

Internal Nonfinancial Quality Metrics

External (Customer Satisfaction) Quality Metrics

Role of Nonfinancial Performance Measures

666

667

Detecting and Correcting Poor Quality

668

Detecting Poor Quality

Taking Corrective Action 670

668

667

Summary 673 Appendix A: Taguchi Quality Loss Functions 673 Key Terms 676 Comments on Cost Management in Action 677 Self-Study Problems 677 Questions 678 Brief Exercises 679 Exercises 680

Problems 687 Solutions to Self-Study Problems

PART FIVE

MANAGEMENT CONTROL

696

698

Chapter 17 Management Control and Strategic Performance Measurement

698

Performance Evaluation and Control

699

Operational Control versus Management Control

Objectives of Management Control

Employment Contracts

699

700

699

Design of Management Control Systems for Motivation

and Evaluation

702

Informal Control Systems

703

Formal Control Systems

704

Strategic Performance Measurement

Decentralization 704

Types of Strategic Business Units

The Balanced Scorecard

706

705

704

Cost Strategic Business Units

706

Strategic Issues Related to Implementing Cost SBUs

Implementing Cost SBUs in Departments

Outsourcing Cost SBUs Cost Allocation 710

708

710

Revenue Strategic Business Units

Profit Strategic Business Units

711

712

Strategic Role of Profit SBUs

The Contribution Income Statement Variable Costing versus Full Costing

712

713

714

706

Strategic Performance Measurement and the Balanced Scorecard 716 Management Control in Service Firms and Not-for-Profit Organizations 720 Summary 722 Key Terms 722 Comments on Cost Management in Action 722 Self-Study Problem 723 Questions 723 Brief Exercises 724 Exercises 725 Problems 727 Solution to Self-Study Problem 740

Chapter 18 Strategic Investment Units and Transfer Pricing 742

Part One: Strategic Investment Units

743

The Strategic Role of Investment Units

743

Return on Investment

744

ROI Equals Return on Sales Times Asset Turnover

Illustration of Evaluation Using Return on Investment

Use of Return on Investment

Strategic Issues in Using Return on Investment

744

747

751

744

Contents

xxiii

Residual Income

753

Limitations of Residual Income

754

Economic Value Added 755 Using Average Total Assets 755 Part Two: Transfer Pricing 756

When Is Transfer Pricing Important?

Objectives of Transfer Pricing

757

756

International Transfer Pricing Objectives

Transfer Pricing Methods

758

757

Choosing the Right Transfer Pricing Method

International Tax Issues in Transfer Pricing

758

761

The Arm’s-Length Standard Advance Pricing Agreements

761

762

Summary 763 Key Terms 763 Comments on Cost Management in Action 763 Self-Study Problems 764 Questions 764 Brief Exercises 764 Exercises 765 Problems 771 Solutions to Self-Study Problems 782

PART SIX

ADVANCED TOPICS IN COST MANAGEMENT 784

Chapter 19 Management Compensation, Business Analysis, and Business Valuation 784

Part One: Management Compensation

Types of Management Compensation

Strategic Role and Objectives of Management Compensation 786

784

785

Design the Compensation Plan for Existing Strategic Conditions 786

786

Ethical Issues

Objectives of Management Compensation

Risk Aversion and Management Compensation

787

787

Bonus Plans

788

Bases for Bonus Compensation

Bonus Compensation Pools

Bonus Payment Options

790

790

788

Tax Planning and Financial Reporting

Management Compensation in Service Firms Part Two: Business Analysis and Business Valuation 794 Business Analysis 795

792

793

Summary 801 Key Terms 801 Comments on Cost Management in Action 801 Self-Study Problems 802 Questions 802 Brief Exercises 803 Exercises 803 Problems 807 Solutions to Self-Study Problems 816

Chapter 20 Capital Budgeting

818

Strategy and the Capital Budgeting Process

Underlying Nature of Capital Expenditures

819

819

Organizational Strategy and the Nature of Capital Investment Analysis 819 Effect of Capital Expenditures on Strategic Cost Drivers Chapter Overview—Where Are We Headed? 821

820

The Role of Accounting in the Capital Budgeting Process 821

821

Linkage to the Balanced Scorecard (BSC)

Generation of Relevant Financial Data for Decision-Making Purposes 823

Linkage to Master Budget

821

Conducting Post-Audits

823

Identification of Relevant Cash-Flow Data for Capital Expenditure Analysis 824

Why Focus on Cash Flows?

Cash Flows—A Framework for Analysis

824

825

Sample Data Set: Mendoza Company—Equipment Replacement

Decision 825

Determining After-Tax Cash Flows for Capital Investment Analysis 827 Recap—Cash Flow Information for the Mendoza Company

Investment Proposal

832

Discounted Cash Flow (DCF) Capital Budgeting

Decision Models

832

Types of Capital Budgeting Decision Models DCF Models: Specifying the Discount Rate Estimating the WACC 834 Net Present Value (NPV) Decision Model

Internal Rate of Return (IRR) Decision Model

Comparison of NPV and IRR Methods: Which to Use?

832

832

836

837

Sensitivity Analysis

839

What-If Analyses

839

Scenario Analysis 841 Monte Carlo Simulation

841

Other Capital Budgeting Decision Models

Payback Period

842

842

839

The Balanced Scorecard

795

Accounting (Book) Rate of Return

844

Financial Ratio Analysis

795

Behavioral Issues in Capital Budgeting

846

Business Valuation

798

The Discounted Cash Flow Method Multiples-Based Valuation 800 Enterprise Value 800

798

Common Behavioral Problems: Cost Escalation,

Incrementalism, and Uncertainty Intolerance

Goal-Congruency Issues

Addressing the Goal-Congruency Problem

847

846

847

xxiv

Contents

Summary 848 Appendix A: DCF Models: Some Advanced Considerations 848 Key Terms 851 Comments on Cost Management in Action 851 Self-Study Problem 852 Questions 853 Brief Exercises 854 Exercises 855

Problems 858 Solution to Self-Study Problem

Present Value Tables

Glossary

Index

872

882

870

866

Cost Management

A Strategic Emphasis