**Cost Management: Accounting and Control**

**Contents**

**Part 1 Foundation to cost management 3**

** A systems framework 3**

** Accounting information system 4**

** Factors affecting cost management 6**

** Global competition 7**

** Growth of the service industry 7**

** Advances in information technology 7**

** Advances in the manufacturing environment 8**

** Customer orientation 9**

** New product development 9**

** Total as a competitive element 10**

** Efficiency 10**

** The role of the management accountant 10 **

** Planning 10 **

** Controlling 11**

** Continuous improvement 11**

** Decision making 11**

** Accountant and ethical conduct 12**

** Benefit of ethical behavior 12 **

**Standards of ethical conduct for management accounting 12**

** Certification 14**

** Certificate in management accounting 14**

** Certificate in public accountant 14 **

** Certificate in internet auditing 14**

** **

**Chapter 2 Basic cost management concepts 23**

** Cost assignment: direct tracing, driver tracing and allocation 23**

** Cost objects 24**

** Accuracy of assignments 24**

** Product costs 26**

** Product cost definitions 27 **

** Product costs and external financial reporting 27**

** External financial statement 30**

** Income statement: manufacturing firm 30**

** Income statement: service organization 32**

** Functional- based and activity-based cost management system 33**

**Functional-based cost management systems: A brief overview 33**

**Activity-based cost management system: a brief overview 34**

**Choice of a cost management system 36**

** **

**Chapter 3 Cost behavior 50**

** Basics of cost behavior 51**

** Fixed costs 51**

** Variable costs 52**

** Mixed costs 53**

** Time horizon 54 **

** Resources, activities, and cost behavior 55**

** Flexible resources 55**

** Committed resources 55**

** Step-cost behavior 56**

** Methods for separating mixed costs into fixed and variable components 58**

** The-high-low method 59**

** Scatter plot method 60**

** The method of least squares 61**

** Using regression programs 63**

** Reliability of cost formulas 64**

** Hypothesis testing of parameters 65**

** Goodness of fit measures 65 **

** Confidence intervals 65**

** Multiple regression 66**

** The learning curve and nonlinear cost behavior 69**

** Cumulative average-time learning curve 69**

** Managerial judgment 71 **

**Chapter 4 Activity-based costing 85**

** Functional-based product costing 86**

** Overhead application: plant wide rate 87**

** Disposition of overheard variances 88**

** Overhead application: departments rates 89**

** Limitation of plant wide and department rates 90**

** Non- unit-related overhead cost 90**

** Product diversity 91 **

** An example illustrating the failure of unit-based overhead rates 91**

** ABC users 96**

** Activity-based costing system 96**

** Activity identification, definition, and classification 97**

** Assigning costs of overhead resources to activities 99**

** Assigning secondary activity costs to primary activities 101**

** Cost objects rates and product costing 102**

** Activity rates and product costing 103**

** Reducing the size and complexity of an ABC system 103**

** Approximately relevant ABC system 104**

** Time-drive ABC system 106**

**Chapter 5 Product and service costing: job-order system 130**

** Characteristics of the production process 130**

** Manufacturing firms versus service firms 131**

** Unique versus standardized production and services 131**

** Setting up the cost account system 132**

** Cost accumulation 132**

** Cost measurement 133**

** Cost assignment 134**

** Choosing the activity level 136**

** The job-order costing system: general description 137**

** Overview of the job-order costing system 137**

** Job time tickers 139**

** Overhead application 140**

** Unit cost calculation 140**

** Job-order costing: specific cost flow description 141**

** Accounting for direct labor cost 141 **

** Accounting for overhead 143**

** Accounting for finished goods inventory 144**

** Accounting for cost of goods sold 146**

** Single versus multiple overhead rates 148**

** Appendix: accounting for spoilage in a traditional job-order system 150**

**Chapter 6 Product and service costing: a process system approach 167**

** Process-costing system: basic operational and cost concepts 167**

** Cost flows 168**

** The production report unit costs 170**

** Unit costs 170**

** Process costing with no beginning or ending work-in-process inventories 173**

** Equivalent units as unit as output measures 173**

** Cost of production report illustrated 174**

** Nonuniform application of productive inputs 174**

** Beginning work-in-process inventories 176**

** FIFO costing method 176 **

** Step 1: physical flow analysis 177**

** Step 2: calculation of equivalent units 178**

** Step 3: computation of unit cost 178**

** Step 4: valuation of inventories 178**

** Step 5: cost reconciliation 179**

** Weighted average costing method 180 **

** Step 1: physical flow analysis 181**

** Step 2: calculation of unit cost 181**

** Step 3: computation of unit cost 182**

** Step 4: valuation of inventories 182**

** Step 5: cost reconciliation 182**

** Production report 183**

** FIFO compared with weighted average 184**

** Treatment of transferred-in goods 184**

** Step 1: Physical flow analysis 185**

** Step 2: Computation of unit costs 186**

** Step 3: Computation of unit costs 186 **

** Step 4: Valuation of inventories 186**

** Operation costing 187**

** Basic of operation costing 188 **

** Operation costing example 189**

** Appendix: soiled unites 191**

** **

**Chapter 7 Allocating costs of support departments and joint products 209**

** An overview of cost allocation 209**

** Types of departments 210**

** Allocating one department`s costs to another department 213**

** A single charging rate 213**

** Dual charging rates 214 **

** Budgeted versus actual usage 216**

** Fixed versus variable bases: A note of caution 218**

** Choosing a support department cost allocation method 219**

** Direct method of allocation 219**

** Sequential method of allocation 220**

** Reciprocal method of allocation 223**

** Comparison of the three method 225**

** Departmental overhead rates and product costing 225**

** Accounting for joint production processes costing 226**

** Cost separability and the need for allocation 227**

** Distinction and similarity between joint production and by products 227]**

** Accounting for joint production costs 228**

** Allocation based on relative market value 230**

**Chapter 8 Budgeting for planning and control 249**

** The role of budgeting in planning and control 250**

**Types of budgets 250 **

**Gathering information for budgeting 252**

** Preparing the operating budget 253**

** Sale budget 254**

** Production budget 255**

** Direct materials purchases budget 255**

** Direct labor budget 256**

** Process value analysis 431**

** Driver analysis: defining root cause 431**

** Activity analysis: identifying and assessing value content 431**

** Assessing activity performance 434**

** Financial measures of activity efficiency 434**

** Reporting value- added and non-value-added costs 434**

** Trend reporting of non-value-added costs 436**

** The role of kaizen standards 437**

** Benchmarking 438**

** Activity flexible budgeting 439**

** Activity capacity management 441**

** Implementing activity-based management 442**

** The ABM implementations model 442**

** Why ABM implementation sometimes fail 444**

** Financial-based versus activity-based responsibility accounting 444**

** Assigning responsibility 445**

** Establishing performance measures 446**

** Evaluating performance 447
Assigning rewards 447 **

**Chapter 13 The balanced scorecard: strategic-based control 467**

** Activity-based versus strategic-based responsibility accounting 468**

** Assigning responsibility 467**

** Establishing performance measures 469**

** Performance measurement and evaluation 470**

** Assigning rewards 471**

** Basic concepts of the balanced scorecard 471**

** Strategy translation 472**

** Financial perspective, objectives, and measures 472**

** Customer perspective, and measures 474**

** Process perspective, objectives, and measures 475**

** Learning and growth perspective, objectives, and measures 478**

** Linking measures to strategy 480**

** The concept of a testable strategy 480**

** Strategic feedback 481**

** Strategic alignment 482**

** Communication the strategy 482**

** Targets and incentives 482**

** Resource allocation 484**

**Chapter 14 Quality and environment cost management 497**

** Costs of quality 498**

** Defining quality costs 498**

** Quality cost measurement 500**

** Reporting quality costs 500**

** The role of activity-based cost management 501**

** Quality cost information and decision making 502**

** Decision-making contexts 502**

** Certifying quality through ISO 9000 505**

** Controlling quality costs 505**

** Choosing the quality standard 507 **

** Types of quality performance report 507 **

**Defining, measuring, and controlling environment costs 511**

** Environmental costs defined 512 **

** Environmental cost report 512**

** Environmental cost reduction 513**

** An environmental financial report 514**

**Chapter 15 Productivity measurement and control 533**

** Production efficiency 534**

** Partial productive measurement 534**

** Partial productivity measurement 534**

** Partial productivity measurement defined 534 **

** Partial measures and measuring change in productive **

** Efficiency 536**

** Advantages of partial measures 537 **

** Disadvantages of partial measures 537**

** Total productivity measurement 537**

** Profile productivity measurement 537**

** Profit-linked productivity measurement 539**

** Price-recovery component 540**

**Measuring changes in activity and process efficiency 541**

** Activity productivity analysis 541**

** Process productivity analysis 543**

** Process productivity model 544**

** Chapter 16 Learn accounting 562**

** Learn manufacturing 563**

** Value by product 564**

** Value by stream 564**

** Value stream mapping 566**

** Value flow 566**

** Pull value 568**

** Pursue perfection 569**

** Lean accounting 571**

** Focused value streams and traceability of overhead costs **

** Value stream costing with multiple products 573**

** Value stream reporting 574**

** Decision making 574**

** Performance measurement 575**

** Implementation 576 **

** Appendix: value stream costing with multiple products:**

** Features and characteristics costing 577**

** Chapter 17 Cost-volume-profit analysis 590**

** The break-even point in units 591**

** Operating income approach 591**

** Contribution margin approach 592**

** Profit targets 593**

** After-tax profit target 594**

** Break-even point in sales dollars 595**

** Profit target 598**

** Comparison of the two approach 598**

** Multiple-product analysis 598**

** Break-even point in units 599**

** Sales mix and CVP analysis 599**

** Sales dollars approach 601 **

** Graphical representation of CVP relationships 601**

** The profit-volume graph 601**

** ` The cost-volume-profit graph 603**

** Assumptions of cost-volume-profit analysis **

** Changes in the CVP variables 604**

** Introducing risk and uncertainty 606**

** Sensitivity analysis and CVP 608**

** CVP analysis and activity-based costing 610**

**Example comparing conventional and ABC **

**analysis **

**Strategic implications: conventional ACP analysis versus ABC**

** CVP analysis and JIT 612**

**Chapter 18 Activity resource usage model and tactical decision making 632**

** Tactical decision making 633**

** The tactical decision-making process 633**

** Qualitative factors 635**

** Relevant costs and revenue 636**

** Relevant costs illustrated 636**

** Irrelevant cost illustrated 636**

**Relevancy, cost behavior, and the activity resource usage model 637**

** Flexible resource 637**

** Committed resource 637**

** Illustrative examples of tactical decision making 638**

** Make-or buy decisions 639**

** Keep-or-drop decisions 642**

** Special-order decision 646**

** Decision to sell or process further 647**

** Chapter 19 Pricing and profitability analysis 669**

** Market structure and price 670**

** Pricing policies 671**

** Cost-based pricing 671**

** Target costing and pricing 672 **

** Other pricing policies 673**

** The legal system and pricing 674**

** Predatory pricing 674**

** Price discrimination 674**

** Ethics 676**

** Measuring profit 676**

**Absorption-costing approach to measuring profit 676 **

**Variable-costing approach to measuring profit 679**

** Profitable of segments 681**

** Profit by product line 681**

** Divisional profit 684**

** Customer profitability 685**

** Overall profit 687**

** Analysis of profit-related variances 687**

** Sales price and price volume variances 687**

** Contribution margin variance 688**

** Market share and market size variances 689**

** Limitation of profit measurement 690**

** Chapter 20 Capital investment decision 715**

** Capital investment decisions 715 **

**Payback and accounting rate of return: nondiscounting methods 716**

**Payback period 716**

**Accounting rate of return 718**

** The net present value method 719**

** The meaning of NPV 719**

** Weighted average cost of capital 719 **

**An example illustrating weighted average cost of capital 720**

** Internal rate of return 721**

** Example with uniform cash flower 721**

** IRR and uneven cash flows **

** NPV versus IRR: mutually exclusive projects 722**

** NPV compared with IRR 722 **

** Example: mutually exclusive project 724**

** Computing after-tax cash flows 726**

**Conversion of gross cash flows to after-tax cash flows 726**

** Capital investment: advance technology and environmental **

** Consideration 732**

** How investment differs 732 **

** How estimates of operation cash flows differ 733**

** An example: investing in advanced technology 733**

** Salvage value 735**

** Discount rates 735**

** Appendix A: present value concepts 737**

** Future value 737**

** Present value 738**

** Present value of a uniform series of cash flows 738**

** Present value of a uniform series of cash flows 738**

** Appendix B: present value table 740**

** Chapter 21 inventory management: economic order quantity, JIT,**

** And the theory of constrains 760 **

** Just-in-case inventory management 761**

**Justifying inventory 761 **

**Economic order quantity: A model for balancing acquisition and carrying costs 762 **

** When to order or produce 763**

** Demand uncertainty and recording 764**

** An example involving setups 765**

** EOQ and inventory management 765**

** JIT inventory management 765**

** A pull system **

** Setup and carrying costs: the JIT approach 767**

**Discounts and price increase: JIT purchasing versus holding inventories 771 **

**JIT‘s limitations 771**

** Basic concepts of constrained optimization 772**

**One binding constraint and external binding constraint 773**

** Multiple internal binding constraints 773**

**Theory of constraints 776**

**Operational measures 777**

**Five-step method for improving performance 778**

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