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ManagementandCostAccounting
ARTICLE·JANUARY2012
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MANAGEMENT andCOSTACCOUNTING
Charles T. HorngrenStanford University
Alnoor BhimaniLondon School of Economics
Srikant M. DatarHarvard University
George FosterStanford University
F T Prentice HallFINANCIAL TIMES
An imprint of Pearson EducationHarlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Singapore • Hong KongTokyo • Seoul • Taipei • New Delhi • Cape Town • Madrid • Mexico City • Amsterdam • Munich • Paris • Milan
Contents
Preface xvGuided tourof the book xviiiGuided tour to Student resources on the web xxGuide to case studies xxiiAcknowledgements xxiv
PART IManagement and costaccounting fundamentals
The accountant's role in theOrganisation 4
Accounting, costing and strategy 5
Accounting Systems and management
controls 7
Costs, benefits and context 12
Themes in the design of managementaccounting Systems 14
# Concepts in action: E-business strategiesand the management accountant 17
• Surveys of Company practice: Managementaccounting Information needs 19
Forces of change in management accounting 19
Summary 23
Appendix: Professional ethics 23
Key terms 25
Further reading 26
Weblinks 26
Assessment material 27
An introduction to cost termsand 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: Purposesfor distinguishing between variable costsand fixed costs 40
Total costs and unit costs 42
• Concepts in action: How application ServiceProviders [ASPs] influence cost structures 43
Financial Statements and cost terminology 45
Service-sector companies 45
Merchandising- and manufacturing-sector
companies 46
The many meanings of product costs 49
Classifications of costs 50
Summary 50
Key terms 51
Weblinks 52
Assessment material 53
Job-costing Systems 61
The building block concept of costing Systems 62
Job-costing and process-costing Systems 62
Job costing in Service organisations using
actual costing 64
Normal costing 66
Job costing in manufacturing 68
• Surveys of Company practice: Cost-allocationbases used for manufacturing overhead 72
An illustration of a job-costing System inmanufacturing 72
Budgeted indirect costs and end-of-period
adjustments 78
Summary 82
Key terms 83
Weblinks 83
Assessment material 84
VII
Contents
Process-costing Systems
Illustrating process costing
Case 1: Process costing with no opening orclosing work-in-progress stock
Case 2: Process costing with no openingbut a closing work-in-progress stock
Case 3: Process costing with both someopening and some closing work-in-progress stock
Weighted-average method
First-in, first-out method
Comparison of weighted-average and FIFOmethods
92
93
94
95
99100103
107Standard-costing method of process costing 109
Transferred-in costs in process costing 113
• Concepts in action: Hybrid costing for
customised products at Levi Strauss 114
Hybrid-costing Systems 120
Summary 120
Appendix: Operation costing 121
Key terms 124
Weblinks 125
Assessment material 126
Cost allocation 132
Purposes of cost allocation 133
Cost-benefit issues and other contextual
factors 134
Cost allocation and costing Systems 135
Indirect cost pools and cost allocation 137
Allocating costs from one department
toanother 139
Allocating costs of Support departments 142
Support department cost-allocation methods 143
Allocating common costs 149
Cost-allocation bases and cost hierarchies 151
Is the product-costing System broken? 153
Summary 153
Key terms 154
Further reading 154
Weblinks 155
Assessment material 156
Cost allocation: joint-cost situations 165
Meaning of Joint products and by-products
terms 166
Why allocate Joint costs? 167
Approaches to allocating Joint costs 168• Concepts in action: Chicken processing:
costing on the disassembly [ine 176
No allocation of Joint costs 177
Irrelevance of Joint costs for decision making 177
• Surveys of Company practice: Joint-costallocation in the oil patch 178
Accounting for by-products 181
Summary 183
Key terms 184
Further reading 184
Weblinks 184
Assessment material 186
Income effects of alternative stock-costing methods 194
PART ONE: Stock-costing methods 195
Variable costing and absorption costing 195
Comparison of variable costing andabsorption costing 199
Capsule comparison of stock-costingmethods 204
Performance measures and absorptioncosting 206
• Surveys of Company practice:Company usage of variable costing 208
PART TWO: Denominator-level concepts
and absorption costing 208
Alternative denominator-level concepts 208
Effect on financial Statements 210
Summary 212
Appendix: Breakeven points in variable
and absorption costing 213
Key terms 214
Weblinks 215
Assessment material 216
VIII
101 The European Savings Bank
102 The ethical dilemma at Northlake
103 Electronic Boards plc
222
222
224
227
Accounting information fordecision making
Cost-volume-profit relationships 232
Revenue drivers and cost drivers 233
CVPassumptions 234
The breakeven point 235
ThePVgraph 238
Impact of income taxes 239
Sensitivity analysis and uncertainty 240
• Concepts in action: Influencing coststructures to manage the risk-returntrade-off at Amazon.com 242
Cost planning and CVP 243
Effects of revenue mix on profit 245
Not-for-profit organisations and CVP 246
Contribution margin and gross margin 247
Summary 248
Appendix: Decision models and uncertainty 249
Key terms 253
Weblinks 253
Assessment material 254
Contents
Non-linearity and cost functions 277
Learning curves and non-linear
cost functions 279
Summary 283
Appendix: Regression analysis 284
Key terms 293
Weblinks 293
Assessment material 294
Relevant information for decisionmaking 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 capacityconstraints 310
# Concepts in action: VW takes outsourcingtothelimit 314
Product-mix decisions under capacity
constraints 315
Customer profitability and relevant costs 316
Irrelevance of past costs and equipment-
replacement decisions 318
Summary 321
Appendix: Linear programming 322
Key terms 326
Further reading 326
Weblinks 326
Assessment material 328
Determining how costs behave 262
Genei J I 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 costingand 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 profitmanagement
341342345345349354
355
ix
Contents
ABC and department-costing Systems 357
Implementing ABC Systems 358
m Concepts in action: Do banks provide 'free'Services? 359
• Surveys of Company practice: Growinginterest in activity-based costing 360
• Concepts in action: Banking on ABC
and ABM information 361
ABC and the organisational context 362
Summary 364
Key terms 364
Further reading 365
Weblinks 365
Assessment material 366
Major influences on pricing 374
Product-cost categories and time horizon 375
Costing and pricing for the short run 375
Costing and pricing for the long run 377
Target costing for target pricing 380
Achieving the target cost per unit forProvalue 384
m Concepts in action: Achieving target costsusing activity-based management atCarrier Ltd 387
Cost-plus pricing 388
Life-cycle product budgeting and costing 390
Customer-profitability analysis 393
Customer revenues 393
Customer costs 394
• Surveys of Company practice: Customer-profitability analysis attracts increasingattention 397
Customer-profitability profiles 397
• Concepts in action: Managing profits byunderstanding customers 399
Summary 400
Key terms
Further reading
Weblinks
Assessment material
401
402
402
403
Two focuses of cost analysis
Stages of capital budgeting
Discounted cash-flow methods
Sensitivity analysis
412
413
415
419
Relevant cash flows in discounted cash-flowanalysis 421
Payback method 424
Accounting rate-of-return method 426
• Surveys of Company practice: Internationalcomparison of capital-budgeting methods 426
Complexities in capital-budgetingapplications 427
Managing the project 429
Income tax factors 430
Capital budgeting and inflation 431Choosing between the net present-value
and the internal rate-of-return decisionapproaches 432
Summary 433
Key terms 434
Further reading 435
Weblinks 435
Assessment material 436
, . . ..t.n.jj» pf u«, v : 448
201 Permaclean Products plc 448
202 The Dublin Shirt Company 450
203 Tankmaster Manufacturing Company 457
204 Internet customer acquisition strategy
at Bankinter 459
205 Torquemada PLC 473
206 Mercedes Benz: All Activity Vehicles 475
207 Colombo Frozen Yogurt 480
Contents
Planning and budgetarycontrol Systems
Motivation, budgets andresponsibility accounting
Flexible budgets, variances andphanagement control: I
Weblinks
Assessment material
549
550
486
Major features of budgets
Roles of budgets
Types of budget
Computer-based financial planning models
® Concepts in action: Putting budgeting onthe fast track with web technology
Kaizen budgeting
Activity-based budgeting
Budgeting and responsibility accounting
Responsibility and controllability
Budgeting: a discipüne in transition
Summary
Appendix: The cash budget
Key terms
Further reading
Weblinks
Assessment material
487
488
493
503
504
504
505
507
508
509
510
511
517
517
517
519
526
Static budgets and flexible budgets
Static-budget variances
Steps in developing a flexible budget
Flexible-budget variances and sales-volume variances
Price variances and efficiency variancesfor inputs
Impact of Stocks
Management uses of variances
Flexible budgeting and activity-based costing
An illustration of Journal entries usingStandard costs
Benchmarking and variance analysis
Summary
Key terms
527
528
529
530
532
537
539
542
544
545
547
548
Flexible budgets, variances andmanagement control: II 561
Developing budgeted variable-overhead
rates 563
Variable-overhead cost variances 564
Developing budgeted fixed-overhead rates 568
Fixed-overhead cost variances 569
Production-volume variance 570
Integrated analysis of overhead cost
variances 571
Different purposes of manufacturing
overhead cost analysis 573
Journal entries for overhead costs and
variances 574
Engineered, discretionary and infrastructure
costs 576
Financial and non-financial Performance
measures 577
Actual, normal and Standard costing 578
Activity-based costing and variance analysis 581
Summary 585
Key terms 586
Weblinks 587
Assessment material 588
Measuring yield, mjx and quantityeffects
Input variances
Direct materials yield and mix variances
Direct manufacturing labour yield and mixvariances
Revenue and sales variances
Variance analysis for multiple products
Summary
Key terms
Weblinks
Assessment material
599
599
604
607
608
615
615
616
617
XI
Contents
301 Zeros plc
302 Instrumental Ltd
303 Fiddler Ltd
304 Letsgo Travel Trailers
305 Hereford Steak Houses
622
622
624
626
628
633
Management control Systemsand Performance issues
Management control Systems 639
Evaluating management control Systems 640
Organisational structure and decentralisation 640
# Concepts in action: Microsofts approach tomanaging 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: Domestictransfer-pricing practices in the UK
A general guideline for transfer-pricing
situations
Transfer pricing and tax considerations
Summary
Key terms
Further reading
Weblinks
Assessment material
641
643
644
645
648
649
652
652
653
654
655
656
656
656
658
. \^ ;_gj!*- -; ., -•• t .. ..
Financial and non-financial Performancemeasures 666
Designing an accounting-based Performance
measure 667
Different Performance measures 667
• Concepts in action: Equifax, AT& T and EVA® 674
Alternative definitions of investment 675
Alternative Performance measures 675
Choosing targeted levels of Performance and
timing of feedback
Distinction between managers and
organisational units
Performance measures at the individual
activity Level
Environmental and ethical responsibilities
Summary
Key terms
Further reading
Weblinks
Assessment material
678
679
682
683
684
684
685
685
686
401 BBRplc
402 Cresta Plating Company Ltd
403 Caja Espana
694
694
698
704
•S
PART VQuality, time and the Strategiemanagement of costs
Quality and throughput concerns inmanaging costs 718
Quality as a competitive weapon 719
Costs of quality 720
Techniques used to identify quality problems 723
Relevant costs and benefits of quality
improvement
m Concepts in action: Does Mercedes stand
for quality?
m Concepts in action: Putting the customerfirst
725
727
728
Non-financial measures of quality andcustomer satisfaction 729
Evaluating quality Performance 731
XII
Contents
Theory of constraints and throughputaccounting 731
% Concepts in action: Throughput accounting
at Allied-Signal, Skelmersdale, UK 734
Summary 735
Key terms 736
Further reading 736
Weblinks 736
Assessment material 738
Accounting for just-fn-tim
Just-in-time Systems 747
Major features of JIT production Systems 747
Enterprise resource planning (ERP) Systems 751
Backflush costing 752
» Concepts in action: Implementing JITatAndreas Stihl KG 753
Managing goods for sale in retailorganisations 761
Challenges in estimating stock-related
costs and their effects 767
Just-in-time purchasing 768
# Concepts in action: Porsches just-in-timerevival 770
Stock costs and their management in
manufacturing organisations 772
Summary 775
Key terms 775
Further reading 776
Weblinks 776
Assessment material 777
Strategie management ao
Conceptions of strategy
• Concepts in action: Changing Strategie gears
What is Strategie management accounting? 790
The balanced scorecard 792
Evaluating the success of a strategy 798
Thetableau debord 801
• Surveys of Company practice:Management aecountants' involvement
in Strategie planning activities 803
Enterprise governance and strategy 804
The Strategie management accounting
Potential 806
Summary 807
Key terms 808
Further reading 808
Weblinks 809
Assessment material 810
816
501 High-Tech Ltd 816
502 Endesa: measuring and Controlling
value 823
503 The Co-operative Bank 833
504 Osram 848
505 Coors 852
Appendix A: Solutions to selected exercises 859
Appendix B: Notes on compound interest
and interest tables 933
Bibliography 941
Glossary 948
Index ofnames 962
Generalindex 964
XIII
