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
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
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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