MANAGEMENT and COSTACCOUNTING

MANAGEMENT and COSTACCOUNTING Charles T. Horngren Stanford University Alnoor Bhimani London School of Economics Srikant M. Datar Harvard University George Foster Stanford University FT Prentice Hall FINANCIAL TIMES An imprint of Pearson Education Harlow, England London New York Boston San Francisco Toronto Sydney Singapore Hong Kong Tokyo Seoul Taipei New Delhi Cape Town Madrid Mexico City Amsterdam Munich Paris Milan

Preface xv Guided tourof the book xviii Guided tour to Student resources on the web xx Guide to case studies xxii Acknowledgements xxiv PART I Management and cost accounting fundamentals The accountant's role in the Organisation 4 Accounting, costing and strategy 5 Accounting Systems and management controls 7 Costs, benefits and context 12 Themes in the design of management accounting Systems 14 # Concepts in action: E-business strategies and the management accountant 17 Surveys of Company practice: Management accounting Information needs 19 Forces of change in management accounting 19 23 Appendix: Professional ethics 23 25 Further reading 26 26 27 An introduction to cost terms and purposes 34 Costs in general 35 Direct costs and indirect costs 36 Cost drivers and cost management 37 Two types of cost behaviour pattern: variable costs and fixed costs 38 Surveys of Company practice: Purposes for distinguishing between variable costs and fixed costs 40 Total costs and unit costs 42 Concepts in action: How application Service Providers [ASPs] influence cost structures 43 Financial Statements and cost terminology 45 Service-sector companies 45 Merchandising- and manufacturing-sector companies 46 The many meanings of product costs 49 Classifications of costs 50 50 51 52 53 Job-costing Systems 61 The building block concept of costing Systems 62 Job-costing and process-costing Systems 62 Job costing in Service organisations using actual costing 64 Normal costing 66 Job costing in manufacturing 68 Surveys of Company practice: Cost-allocation bases used for manufacturing overhead 72 An illustration of a job-costing System in manufacturing 72 Budgeted indirect costs and end-of-period adjustments 78 82 83 83 84 VII

Process-costing Systems 92 Cost allocation: joint-cost situations 165 Illustrating process costing Case 1: Process costing with no opening or closing work-in-progress stock Case 2: Process costing with no opening but a closing work-in-progress stock Case 3: Process costing with both some opening and some closing work-inprogress stock Weighted-average method First-in, first-out method Comparison of weighted-average and FIFO methods 93 94 95 99 100 103 107 Standard-costing method of process costing 109 Transferred-in costs in process costing 113 Concepts in action: Hybrid costing for customised products at Levi Strauss 114 Hybrid-costing Systems 120 120 Appendix: Operation costing 121 124 125 126 Cost allocation 132 Purposes of cost allocation 133 Cost-benefit issues and other contextual factors 134 Cost allocation and costing Systems 135 Indirect cost pools and cost allocation 137 Allocating costs from one department toanother 139 Allocating costs of Support departments 142 Support department cost-allocation methods 143 Allocating common costs 149 Cost-allocation bases and cost hierarchies 151 Is the product-costing System broken? 153 153 154 Further reading 154 155 156 Meaning of Joint products and by-products terms 166 Why allocate Joint costs? 167 Approaches to allocating Joint costs 168 Concepts in action: Chicken processing: costing on the disassembly [ine 176 No allocation of Joint costs 177 Irrelevance of Joint costs for decision making 177 Surveys of Company practice: Joint-cost allocation in the oil patch 178 Accounting for by-products 181 183 184 Further reading 184 184 186 Income effects of alternative stockcosting methods 194 PART ONE: Stock-costing methods 195 Variable costing and absorption costing 195 Comparison of variable costing and absorption costing 199 Capsule comparison of stock-costing methods 204 Performance measures and absorption costing 206 Surveys of Company practice: Company usage of variable costing 208 PART TWO: Denominator-level concepts and absorption costing 208 Alternative denominator-level concepts 208 Effect on financial Statements 210 212 Appendix: Breakeven points in variable and absorption costing 213 214 215 216 VIII

101 The European Savings Bank 102 The ethical dilemma at Northlake 103 Electronic Boards plc Accounting information for decision making 222 222 224 227 Non-linearity and cost functions 277 Learning curves and non-linear cost functions 279 283 Appendix: Regression analysis 284 293 293 294 Cost-volume-profit relationships 232 Revenue drivers and cost drivers 233 CVPassumptions 234 The breakeven point 235 ThePVgraph 238 Impact of income taxes 239 Sensitivity analysis and uncertainty 240 Concepts in action: Influencing cost structures to manage the risk-return trade-off at Amazon.com 242 Cost planning and CVP 243 Effects of revenue mix on profit 245 Not-for-profit organisations and CVP 246 Contribution margin and gross margin 247 248 Appendix: Decision models and uncertainty 249 253 253 254 Relevant information for decision making 301 Information and the decision process 302 The concept of relevance 303 An illustration of relevance: choosing Output levels 305 Outsourcing and make-or-buy decisions 307 Opportunity costs, outsourcing and capacity constraints 310 # Concepts in action: VW takes outsourcing tothelimit 314 Product-mix decisions under capacity constraints 315 Customer profitability and relevant costs 316 Irrelevance of past costs and equipmentreplacement decisions 318 321 Appendix: Linear programming 322 326 Further reading 326 326 328 Determining how costs behave 262 Genei JI ibüuej in eülmidlmy >_o;>l luncliuiib 263 The cause-and-effect criterion in choosing cost drivers 266 Cost estimation approaches 267 Steps in estimating a cost function 268 Evaluating and choosing cost drivers 274 Cost drivers and activity-based costing 276 Concepts in action: Activity-based costing and cost estimation 276 Activity-based costing Undercosting and overcosting Costing System at Plastim Limited Refining a costing system Activity-based costing Systems Implementing ABC at Plastim Limited Comparing alternative costing Systems Using ABC Systems for cost and profit management 341 342 345 345 349 354 355 ix

ABC and department-costing Systems 357 Implementing ABC Systems 358 m Concepts in action: Do banks provide 'free' Services? 359 Surveys of Company practice: Growing interest in activity-based costing 360 Concepts in action: Banking on ABC and ABM information 361 ABC and the organisational context 362 364 364 Further reading 365 365 366 Major influences on pricing 374 Product-cost categories and time horizon 375 Costing and pricing for the short run 375 Costing and pricing for the long run 377 Target costing for target pricing 380 Achieving the target cost per unit for Provalue 384 m Concepts in action: Achieving target costs using activity-based management at Carrier Ltd 387 Cost-plus pricing 388 Life-cycle product budgeting and costing 390 Customer-profitability analysis 393 Customer revenues 393 Customer costs 394 Surveys of Company practice: Customerprofitability analysis attracts increasing attention 397 Customer-profitability profiles 397 Concepts in action: Managing profits by understanding customers 399 400 Further reading Two focuses of cost analysis Stages of capital budgeting Discounted cash-flow methods Sensitivity analysis 401 402 402 403 412 413 415 419 Relevant cash flows in discounted cash-flow analysis 421 Payback method 424 Accounting rate-of-return method 426 Surveys of Company practice: International comparison of capital-budgeting methods 426 Complexities in capital-budgeting applications 427 Managing the project 429 Income tax factors 430 Capital budgeting and inflation 431 Choosing between the net present-value and the internal rate-of-return decision approaches 432 433 434 Further reading 435 435 436,....t.n.jj» pf u«, v: 448 201 Permaclean Products plc 448 202 The Dublin Shirt Company 450 203 Tankmaster Manufacturing Company 457 204 Internet customer acquisition strategy at Bankinter 459 205 Torquemada PLC 473 206 Mercedes Benz: All Activity Vehicles 475 207 Colombo Frozen Yogurt 480

Planning and budgetary control Systems 549 550 Motivation, budgets and responsibility accounting Major features of budgets Roles of budgets Types of budget Computer-based financial planning models Concepts in action: Putting budgeting on the fast track with web technology Kaizen budgeting Activity-based budgeting Budgeting and responsibility accounting Responsibility and controllability Budgeting: a discipüne in transition Appendix: The cash budget Further reading Flexible budgets, variances and phanagement control: I Static budgets and flexible budgets Static-budget variances Steps in developing a flexible budget Flexible-budget variances and salesvolume variances Price variances and efficiency variances for inputs Impact of Stocks Management uses of variances Flexible budgeting and activity-based costing An illustration of Journal entries using Standard costs Benchmarking and variance analysis 486 487 488 493 503 504 504 505 507 508 509 510 511 517 517 517 519 526 527 528 529 530 532 537 539 542 544 545 547 548 Flexible budgets, variances and management control: II 561 Developing budgeted variable-overhead rates 563 Variable-overhead cost variances 564 Developing budgeted fixed-overhead rates 568 Fixed-overhead cost variances 569 Production-volume variance 570 Integrated analysis of overhead cost variances 571 Different purposes of manufacturing overhead cost analysis 573 Journal entries for overhead costs and variances 574 Engineered, discretionary and infrastructure costs 576 Financial and non-financial Performance measures 577 Actual, normal and Standard costing 578 Activity-based costing and variance analysis 581 585 586 587 588 Measuring yield, mjx and quantity effects Input variances Direct materials yield and mix variances Direct manufacturing labour yield and mix variances Revenue and sales variances Variance analysis for multiple products 599 599 604 607 608 615 615 616 617 XI

301 Zeros plc 302 Instrumental Ltd 303 Fiddler Ltd 304 Letsgo Travel Trailers 305 Hereford Steak Houses 622 622 624 626 628 633 Management control Systems and Performance issues Management control Systems 639 Evaluating management control Systems 640 Organisational structure and decentralisation 640 # Concepts in action: Microsofts approach to managing responsibility Choices about responsibility centres Transfer pricing An illustration of transfer pricing Market-based transfer prices Cost-based transfer prices Negotiated transfer prices Surveys of Company practice: Domestic transfer-pricing practices in the UK A general guideline for transfer-pricing situations Transfer pricing and tax considerations Further reading 641 643 644 645 648 649 652 652 653 654 655 656 656 656 658. \^ ;_gj!*- -;.,- t.... Financial and non-financial Performance measures 666 Designing an accounting-based Performance measure 667 Different Performance measures 667 Concepts in action: Equifax, AT& T and EVA 674 Alternative definitions of investment 675 Alternative Performance measures 675 Choosing targeted levels of Performance and 678 timing of feedback Distinction between managers and organisational units Performance measures at the individual activity Level Environmental and ethical responsibilities Further reading 401 BBRplc 402 Cresta Plating Company Ltd 403 Caja Espana S 679 682 683 684 684 685 685 686 694 694 698 704 PART V Quality, time and the Strategie management of costs Quality and throughput concerns in managing costs 718 Quality as a competitive weapon 719 Costs of quality 720 Techniques used to identify quality problems 723 Relevant costs and benefits of quality improvement m Concepts in action: Does Mercedes stand for quality? 725 727 m Concepts in action: Putting the customer first 728 Non-financial measures of quality and customer satisfaction 729 Evaluating quality Performance 731 XII

Theory of constraints and throughput accounting 731 % Concepts in action: Throughput accounting at Allied-Signal, Skelmersdale, UK 734 735 736 Further reading 736 736 738 Accounting for just-fn-tim Just-in-time Systems 747 Major features of JIT production Systems 747 Enterprise resource planning (ERP) Systems 751 Backflush costing 752» Concepts in action: Implementing JITat Andreas Stihl KG 753 Managing goods for sale in retail organisations 761 Challenges in estimating stock-related costs and their effects 767 Just-in-time purchasing 768 # Concepts in action: Porsches just-in-time revival 770 Stock costs and their management in manufacturing organisations 772 775 775 Further reading 776 776 777 Strategie management ao Conceptions of strategy Concepts in action: Changing Strategie gears What is Strategie management accounting? 790 The balanced scorecard 792 Evaluating the success of a strategy 798 Thetableau debord 801 Surveys of Company practice: Management aecountants' involvement in Strategie planning activities 803 Enterprise governance and strategy 804 The Strategie management accounting Potential 806 807 808 Further reading 808 809 810 816 501 High-Tech Ltd 816 502 Endesa: measuring and Controlling value 823 503 The Co-operative Bank 833 504 Osram 848 505 Coors 852 Appendix A: Solutions to selected exercises 859 Appendix B: Notes on compound interest and interest tables 933 Bibliography 941 Glossary 948 Index ofnames 962 Generalindex 964 XIII