cost management - accounting and control 6th ed (intro txt) - d. hansen, et al., (cengage, 2009)

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Don R. Hansen
Oklahoma State University
Maryanne M. Mowen
Oklahoma State University
Liming Guan
University of Hawaii at Manoa
Sixth Edition
Cost Management
Accounting & Control
Cost Management: Accounting and Control, 6
th

Edition
Hansen Mowen
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To Our Parents
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PREFACE
v
O
ver the past twenty years, changes in the business environment have profoundly
affected cost accounting and cost management. A few examples of these changes
are an increased emphasis on providing value to customers, total quality manage-
ment, time as a competitive element, advances in information and manufacturing tech-
nology, globalization of markets, service industry growth, deregulation, and heightened

awareness of ethical and environmental business practices. These changes are driven by
the need to create and sustain a competitive advantage. For many firms, the information
required to realize a competitive advantage can no longer be derived from a traditional
cost management system. The traditional system relies on functional-based costing and
control. In a functional-based system, costing and control are centered on organizational
functions. Unfortunately, this functional-based approach often fails to provide informa-
tion that is detailed, accurate, and timely enough to support the requirements of this new
environment. This has resulted in the emergence of an activity-based cost management
system. Typically, an activity-based cost management system is more detailed and more
accurate than a functional-based cost management system and, thus, more costly to
operate. Furthermore, the need to add a formal guidance mechanism to the new activity-
based system has created a demand for strategic-based cost management. Thus, the new
cost management system might be more accurately referred to as an activity- and strategic-
based cost management system. The adoption of activity- and strategic-based cost man-
agement in many firms therefore suggests that in many cases the benefits of this more
sophisticated system outweigh its costs. On the other hand, the continued existence and
reliance on functional-based systems suggests the opposite for other firms.
The coexistence of functional-based systems with activity- and strategic-based cost
management systems necessitates the study of both systems, thus providing flexibility and
depth of understanding. In creating a text on cost management, we had to decide how to
design its structure. We believe that a systems approach provides a convenient and logical
framework. Using a systems framework allows us to easily integrate the functional- and
activity-based approaches in a way that students can easily grasp. Integration is achieved by
developing a common terminology—a terminology that allows us to define each system and
discuss how they differ. Then the functional and activity-based approaches can be compared
and contrasted as they are applied to costing, control, and decision making. We believe this
integration will allow students to appreciate the differences that exist between functional-
and activity-based approaches. This integration is especially useful in the decision-making
chapters, as it allows students to see how decisions change as the information set changes.
For example, how does a make-or-buy decision change as we move from a functional-based,

traditional cost management system to the richer, activity-based cost management system?
Compared to the 5th edition, this text has been streamlined by combining and
eliminating some materials. Notably, the coverage of environmental costs in Chapter 16
is reduced and combined with Chapter 14. A new Chapter 16, on lean accounting, is
instituted for this edition. The end-of-chapter exercises are also streamlined.
vi Preface
AUDIENCE
This text is written primarily for students at the undergraduate level. The text presents
a thorough treatment of traditional and contemporary approaches to cost management,
accounting, and control and can be used for a one- or two-semester course. In our opinion,
the text also has suffi cient depth for graduate level courses. In fact, we have successfully
used the text at the graduate level.
KEY FEATURES
We feel that the text offers a number of distinctive and appealing features—features that
should make it much easier to teach students about the emerging themes in today’s business
world. One of our objectives was to reduce the time and resources expended by instructors
so that students can be more readily exposed to today’s topics and practices. To help you
understand the text’s innovative approach, we have provided a detailed description of its
key features.
STRUCTURE
The text’s organization follows a systems framework and is divided into four parts:
1. Part 1: Foundation Concepts. Chapters 1 through 4 introduce the basic concepts
and tools associated with cost management systems.
2. Part 2: Fundamental Costing and Control. Chapters 5 through 10 provide thor-
ough coverage of product costing, planning, and control in both functional-based
and activity-based costing systems.
3. Part 3: Advanced Costing and Control. Chapters 11 through 16 present the key
elements of the new cost management approaches. Examples of the topics cov-
ered in this section include activity-based customer and supplier costing, strategic
cost management, activity-based budgeting, activity-based management, process

value analysis, target costing, kaizen costing, quality costing, environmental cost
management, productivity, the Balanced Scorecard, and lean manufacturing and
accounting.
4. Part 4: Decision Making. Chapters 17 through 21 bring the costing and control
tools together in the discussion of decision making.
This edition’s structure permits integrated coverage of both the traditional and activity-
based costing systems. In this way, students can see how each system can be used for
costing, control, and decision making and can evaluate the advantages and disadvantages
of each system. This approach helps students to see how cost management is applied to
problems in today’s world and to understand the richness of the approaches to business
problems.
CONTEMPORARY TOPICS
The emerging themes of cost management are covered in depth. We have provided a
framework for comprehensively treating both functional-based and activity-based topics. A
common terminology links the two approaches; however, the functional- and activity-based
approaches differ enough to warrant separate and comprehensive treatments. The nature
and extent of the coverage of contemporary topics is described below. As this summary
reveals, there is suffi cient coverage of activity- and strategic-based topics to provide a course
that strongly emphasizes these themes.
Preface vii
Historical Perspective
Chapter 1 provides a brief history of cost accounting. The historical perspective allows
students to see why functional-based cost management systems work well in some settings
but no longer work for other settings. The forces that are changing cost management
practices are described. The changing role of the management accountant is also covered
with particular emphasis on why the development of a cross-functional expertise is so
critical in today’s environment.
Accounting and Cost Management Systems
In Chapter 1, the accounting information system and its different subsystems are defi ned.
Distinctions are made between the fi nancial accounting and the cost management systems

and the differing purposes they serve. The cost management system is broken down into
the cost accounting system and the operational control system. The differences between
functional-based and activity-based cost management systems are defi ned and illustrated.
The criteria for choosing an activity-based system over a functional-based system are also
discussed.
Cost Assignment Methods
In Chapter 2, three methods of cost assignment are delineated: direct tracing, driver
tracing, and allocation. Activity drivers are also defi ned. Once the general cost assignment
model is established, the model is used to help students understand the differences between
functional-based and activity-based cost management systems. A clear understanding of
how the two systems differ is fundamental to the organizational structure that the text
follows.
Value Chain Analysis
The provision of value to customers is illustrated by the internal value chain, which is fi rst
introduced in Chapter 1 and defi ned and illustrated more completely in Chapter 2. Chapter
11 provides a detailed discussion of value chain analysis and introduces the industrial value
chain. Value chain analysis means that managers must understand and exploit internal and
external linkages so that a sustainable competitive advantage can be achieved. Exploitation
of these linkages requires a detailed understanding of the costs associated with both
internal and external factors. This edition expands the treatment of value chain analysis
by introducing, defi ning, and illustrating activity-based supplier costing and activity-based
customer costing. The costing examples developed show how the value chain concepts can
be operationalized—a characteristic not clearly described by other treatments. Thus, we
believe that the operational examples are a signifi cant feature of the text.
Activity Costs Change as Activity Usage Changes
Chapter 3 is a comprehensive treatment of cost behavior. First, we defi ne variable, fi xed, and
mixed activity cost behavior. Then, we discuss the activity resource usage model and detail
the impact of fl exible and committed resources on cost. Finally, we describe the methods
of breaking out fi xed and variable activity costs. The chapter on cost behavior analysis
is more general than usual chapters that treat the subject. Traditional treatment usually

focuses on cost as a function of production volume. We break away from this pattern and
focus on cost as a function of changes in activity usage with changes in production activity
as a special case. The activity resource usage model is used to defi ne activity cost behavior
(in terms of when resources are acquired) and is defi ned and discussed in Chapter 3. This
resource usage model plays an important role in numerous contemporary applications. It
viii Preface
is used in value chain analysis (Chapter 11), activity- based management (Chapter 12), and
tactical decision and relevant costing analysis (Chapter 18). The extensive applications of
the activity resource usage model represent a unique feature of the text.
Activity-Based Costing
Much has been written on the uses and applications of ABC. This text presents a
comprehensive approach to activity-based costing and management. The activity-based
product costing model is introduced in Chapter 2 and described in detail in Chapter 4. In
this chapter, the advantages of ABC over functional-based costing are related. A complete
discussion of how to design an ABC system is given. This includes identifying activities,
creating an activity dictionary, assigning costs to activities, classifying activities as primary
and secondary, and assigning costs to products. To fully understand how an ABC system
works, students must understand the data needed to support the system. Thus, we show how
the general ledger system must be unbundled to provide activity information. Methods on
simplifying a complex ABC system are discussed. In addition to discussion of approximately
relevant ABC systems, we have added new material on the time-driven ABC systems.
Activity-Based Budgeting
Activity-based budgeting is now combined with traditional budgeting concepts in Chap-
ter 8. This integrated treatment helps students to see how budgets can be extended with
the power of activity-based cost concepts. This chapter introduces the basics of activity-
based budgeting and gives an expanded example in a service setting. Flexible budgeting
and the behavioral impact of budgets are also included in this chapter.
Just-in-Time Effects
JIT manufacturing and purchasing are defi ned and their own cost management practices
discussed in Chapters 11 and 21. JIT is compared and contrasted with traditional man-

ufacturing practices. The effects on areas such as cost traceability, inventory management,
product costing, and responsibility accounting are carefully delineated.
Life Cycle Cost Management
In Chapter 11, we defi ne and contrast three different life cycle viewpoints: production life
cycle, marketing life cycle, and consumable life cycle. We then show how these concepts
can be used for strategic planning and analysis. In later chapters, we show how life cycle
concepts are useful for pricing and profi tability analysis (Chapter 19). The breadth, depth,
and numerous examples illustrating life cycle cost applications allow students to see the
power and scope of this methodology.
Strategic Cost Management
A detailed introduction to strategic cost management is provided in Chapter 11.
Understanding strategic cost analysis is a vital part of the new manufacturing environment.
Strategic cost management is defi ned and illustrated. Strategic positioning is discussed.
Structural and executional cost drivers are introduced. Value chain analysis is described
with the focus on activity-based supplier and customer costing. The role of target costing
in strategic cost management is also emphasized.
Activity-Based Management
and the Balanced Scorecard
There are three types of responsibility accounting systems: functional-based, activity-based,
and strategic-based. These three systems are compared and contrasted, and the activity-
Preface ix
and strategic-based responsibility accounting systems are discussed in detail. Activity-
based responsibility accounting focuses on controlling and managing processes. The
mechanism for doing this process value analysis is defi ned and thoroughly discussed in
Chapter 12. Numerous examples are given to facilitate understanding. Value-added and
non-value-added cost reports are described. Activity-based responsibility accounting also
covers activity measures of performance, which are thoroughly covered in Chapter 13.
The Balanced Scorecard is equivalent to what we are calling strategic-based responsibility
accounting. The basic concepts and methods of the Balanced Scorecard are presented in
Chapter 13.

Costs of Quality: Measurement and Control
Often, textual treatments simply defi ne quality costs and present cost of quality reports.
We go beyond this simple presentation (in Chapter 14) and discuss cost of quality
performance reporting. We also describe quality activities in terms of their value-
added content. In addition, we introduce and describe ISO 9000, an important quality
assurance and reporting system that many fi rms must now follow. Finally, Chapter 14
emphasizes the growing strategic importance of environmental cost management. This
chapter introduces and discusses the concept of ecoeffi ciency. It also defi nes, classifi es, and
illustrates the reporting of environmental costs and how to assign those costs to products
and processes.
Productivity: Measurement and Control
The new manufacturing environment demands innovative approaches to performance
measurement. Productivity is one of these approaches; yet it is either only superfi cially
discussed in most cost and management accounting texts or not treated at all. In Chapter
15, we offer a thorough treatment of the topic, including some new material on how to
measure activity and process productivity.
Lean Accounting
This text adds a new subject on lean manufacturing and lean accounting in Chapter 16.
Many companies are changing their business processes to focus on the customer as well
as on the value chain activities that support a customer orientation and focus on the
elimination of waste. These companies have embarked on lean manufacturing that aims at
shedding waste. The change in manufacturing process leads to the change in accounting.
This change in accounting, referred to as lean accounting, organizes costs according to
the value chain and collects both fi nancial and nonfi nancial information. The objective is
to provide fi nancial statements that better refl ect overall performance, using both fi nancial
and nonfi nancial information.
Theory of Constraints
We introduce the theory of constraints (TOC) in Chapter 21. A linear programming
framework is used to facilitate the description of TOC and provide a setting where students
can see the value of linear programming. In fact, our treatment of linear programming is

motivated by the need to develop the underlying concepts so that TOC can be presented
and discussed. This edition expands the coverage of TOC by adding a discussion of
constraint accounting.
Service Sector Focus
The signifi cance of the service sector is recognized in this text through the extensive
application of cost management principles to services. The text explains that services
are not simply less complicated manufacturing settings but instead have their own
x Preface
characteristics. These characteristics require modifi cation of cost management accounting
principles. Sections addressing services appear in a number of chapters, including product
costing, pricing, and quality and productivity measurement.
Professional Ethics
Strong professional ethics need to be part of every accountant’s personal foundation. We
are convinced that students are interested in ethical dimensions of business and can be
taught areas in which ethical confl icts occur. Chapter 1 introduces the role of ethics and
reprints the ethical standards developed by the Institute of Management Accountants. To
reinforce coverage of ethics, most chapters have an ethics case for discussion. In addition,
many chapters include sections on ethics. For example, Chapter 19, on pricing and revenue
analysis, includes material on the ethical dimensions of pricing.
Behavioral Issues
Ethical behavior is just one aspect of human behavior that is affected by cost management
systems. The systems used for planning, control, and decision making can affect the way
in which people act. Insights from behavioral decision theory are presented in appropriate
sections of the text. For example, a discussion of the ways profi t measurement can affect
people’s behavior is included in Chapter 19. Chapter 8, on activity-based budgeting,
includes a section on the behavioral impact of budgets. We believe that an integration of
behavioral issues with accounting issues leads to a more complete understanding of the
role of the accountant today.
Real World Examples
Our years of experience in teaching cost and management accounting have convinced us

that students like and understand real world applications of accounting concepts. These
real world examples make the abstract accounting ideas concrete and provide meaning and
color. Besides, they’re interesting and fun. Therefore, real world examples are integrated
throughout every chapter. Use of color for company names that appear in the chapters and
the company index at the end of the text will help you locate these examples.
Outstanding Pedagogy
We think of this text as a tool that can help students learn cost accounting and cost
management concepts. Of paramount importance is text readability. We have tried to
write a very readable text and to provide numerous examples, real world applications,
and illustrations of important cost accounting and cost management concepts. Specifi c
“student-friendly” features of the pedagogy include the following:
• Whenever possible, graphical exhibits are provided to illustrate concepts. In our expe-
rience, some students need to “see” the concept; thus, we have attempted to portray
key concepts to enhance understanding. Of course, many numerical examples are also
provided.
• All chapters (except Chapter 1) include at least one review problem and solution.
These problems demonstrate the computational aspects of chapter materials and rein-
force the students’ understanding of chapter concepts before they undertake end-of-
chapter materials.
• A glossary of key terms is included at the end of the text. Key terms lists at the end of
each chapter identify text pages for fuller explanation.
• All chapters include comprehensive end-of-chapter materials. These are divided into
“Questions for Writing and Discussion,” “Exercises,” and “Problems.” The Questions
Preface xi
for Writing and Discussion emphasize communication skill development. Exercises
and Problems to support every learning objective are included, and the relevant topics
and learning objectives are noted in the text margins. The exercises and problems are
graduated in difficulty from easy to challenging. CMA problems are included to give
the student access to relevant problem material found on the examination.
• This edition continues to offer cooperative learning exercises in the end-of-chapter

materials in each chapter. These exercises encourage students to work in groups to
solve cost management problems.
• Spreadsheet template problems are identified in the end-of-chapter materials with
an appropriate icon. These problems are designed to help students use spreadsheet
applications to solve cost accounting problems.
COMPREHENSIVE SUPPLEMENTS PACKAGE
Check Figures. Check figures for solutions to selected problems in certain chapters
are provided on the Instructor’s Resource CD-Rom as an aid to students as they prepare
their answers. Instructors may copy and distribute these as they see fit.
Instructor’s Manual. The instructor’s manual contains a complete set of lecture
notes for each chapter, a listing of all exercises and problems with estimated difficulty and
time required for solution, and a list of relevant chapter exhibits.
Solutions Manual. The solutions manual contains the solutions for all end-of-
chapter questions, exercises, and problems. Solutions have been verified several times to
ensure their accuracy and reliability.
Test Bank. The test bank offers multiple-choice problems, short problems, and essay
problems. Designed to make exam preparation as convenient as possible for the instruc-
tor, each test bank chapter contains enough questions and problems to permit the prepa-
ration of several exams without repetition of material. Available electronically only on the
Instructor’s Resource CD-Rom.
ExamView Testing Software. This program is an easy-to-use test creation soft-
ware compatible with Microsoft Windows. Instructors can add or edit questions, instruc-
tions, and answers, and select questions (randomly or numerically) by previewing them
on the screen. Instructors can also create and administer quizzes online, whether over the
Internet, a local area network (LAN), or a wide area network (WAN). Available only on
the Instructor’s Resource CD-Rom.
Spreadsheet Templates. Spreadsheet templates using Microsoft Excel
®
provide
outlined formats of solutions for selected end-of-chapter exercises and problems. These

exercises and problems are identified with a margin symbol. The templates allow students
to develop spreadsheet and “what-if” analysis skills. The student templates can be down-
loaded from the text website. The solutions are available on the Instructor’s Resource
CD-Rom or via download from the website.
PowerPoint Slides. Selected transparencies of key concepts and exhibits from the
text are available in PowerPoint presentation software. These slides provide a comprehen-
sive outline of each chapter. Available for download on the text website (instructors only)
or on the Instructor’s Resource CD-Rom.
Instructor’s Resource CD-ROM, 0-324-65730-7. Key instructor ancil-
laries (solutions manual, instructor’s manual, test bank, and PowerPoint slides) are pro-
vided on CD-Rom, giving instructors the ultimate tool for customizing lectures and
presentations.
xii Preface
Website (
A website designed specifically for Cost Management, sixth edition, provides online and
downloadable resources for both instructors and students. The website features learning
objectives, web links, glossaries, and online quizzes.
The Business & Company Resource Center. An easy way to give students
access to a dynamic database of business information and resources is offered by way of
the Business & Company Resource Center (BCRC). The BCRC provides online access
to a wide variety of global business information including current articles and business
journals, detailed company and industry information, investment reports, stock quotes,
and much more. The BCRC saves valuable time and provides students a safe resource in
which to hone their research skills and develop their analytical abilities. Other benefits of
the BCRC include:
• Convenient access from anywhere with an Internet connection, allowing students to
access information at school, at home, or on the go.
• A powerful and time-saving research tool for students—whether they are completing a
case analysis, preparing for a presentation, creating a business plan, or writing a reac-
tion paper.

• Serving as an online coursepack, allowing instructors to assign readings and research-
based assignments or projects without the inconvenience of library reserves, permis-
sions, and printed materials.
• Acts as a filter, eliminating the “junk” information often found when searching
the Internet, providing only high- quality, safe, and reliable news and information
sources.
• Infomarks that make it easy to assign homework, share articles, create journal lists,
and save searches. Instructors can combine the BCRC with their favorite Harvard
Business School Publishing cases to provide students a case analysis research tool at no
additional cost. Contact your local South-western/Cengage Learning representative
to learn how to include Business & Company Resource Center with your text.
Harvard Business Case Studies. The leader in business education publishing part-
ners with the leader in business cases to offer Harvard Business Case Studies. As part of
South-western/Cengage Learning’s commitment to giving customers the greatest choice
of teaching and learning solutions possible, we are proud to be an official distributor of
Harvard Business School Publishing case collections and article reprints. The combination
of preeminent cases and articles from Harvard Business School Publishing with the unpar-
alleled scope and depth of customizable content from South-western/Cengage Learning
provides instructors and students with a wide array of learning materials. You can draw
from multiple resources and disciplines to match the unique needs of your course. This
bundling offers the following conveniences:
• For Instructors: Instructors can work with one source instead of multiple vendors,
allowing the local Cengage Learning representative to manage the prompt delivery of
teaching resources and students materials.
• For Students: Pricing for cases is very affordable—and when packaged with the text-
book, students receive a significant discount on the text and coursepak.
• Ordering: Once you have identified the cases and articles you want to use, simply
use an order form provided by your Cengage Learning representative to indicate
your selections and packaging preferences. Once you return your form, you will be
contacted within 48 hours by a Cengage Learning customer representative to confirm

your order and walk you through the rest of the process.
Combine Harvard Business School cases and articles with the BCRC and take your
coursepak to the next level. Contact your sales representative for details.
Preface xiii
Many people have provided valuable feedback to help improve the text. We appreciate the
comments from the following reviewers:
Michael Flores, Wichita State University
Ra k Elias, California State University – Los Angeles
Sanjay Gupta, Valdosta State University
Frank Stangota, Rutgers University
Nat Briscoe, Northwestern State University
Terry Dancer, Arkansas State University
Martha Lair Sale, Sam Houston State University
Cheryl Copeland, California State University – Fresno
Bruce Bradford, Fair eld University
Cecil M. Battiste III, Valencia Community College
Chiaho Chang, Montclair State University
Marvin L. Bouillon, Iowa State University
Darlene Coarts, University of Northern Iowa
Special thanks to Jim Emig for his careful veri cation of the solutions manual and test bank.
Additional thanks goes to the students of Oklahoma State University and the University
of Hawaii. Students represent our true constituency and greatly re ect the enhancements
we make to each edition of this text.
Finally, we want to express our gratitude to the Institute of Management Accountants
for its permission to use adapted problems from past CMA examinations and to reprint
the ethical standards of conduct for management accountants.
Don R. Hansen, Maryanne M. Mowen, Liming Guan
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ABOUT THE AUTHORS
Don R. Hansen

Dr. Don R. Hansen is Head of the School of Accounting at Oklahoma State University.
He received his Ph.D. from the University of Arizona in 1977. He has an undergraduate
degree in mathematics from Brigham Young University. His research interests include
activity-based costing and mathematical modeling. He has published articles in both ac-
counting and engineering journals including The Accounting Review, The Journal of Man-
agement Accounting Research, Accounting Horizons, and IIE Transactions. He has served
on the editorial board of The Accounting Review. His outside interests include family,
church activities, reading, movies, watching sports, and studying Spanish.
Maryanne M. Mowen
Dr. Maryanne M. Mowen is Associate Professor of Accounting at Oklahoma State
University. She received her Ph.D. from Arizona State University in 1979. Dr. Mow-
en brings an interdisciplinary perspective to teaching and writing in cost and manage-
ment accounting, with degrees in history and economics. In addition, she does research
in areas of behavioral decision making, activity-based costing, and the impact of the
Sarbanes-Oxley Act. She has published articles in journals such as Decision Science,
The Journal of Economics and Psychology, and The Journal of Management Accounting
Research. Dr. Mowen’s interests outside the classroom include reading mysteries, travel-
ing, and working crossword puzzles.
Liming Guan
Dr. Liming Guan is Associate Professor of Accounting at the University of Hawaii at
Manoa. He received his Ph.D. in accounting from Oklahoma State University in 2001. Dr.
Guan has a bachelor’s degree in management science and a master’s degree in agricultural
economics. His research interests are in the areas of earnings management and accounting
systems design. He has published more than twenty articles in journals such as Advances
in Accounting, Journal of International Accounting Research, Journal of International
Financial Management and Accounting, Journal of Forensic Accounting, ACM DataBase,
and International Journal of Accounting Information Systems. Outside the classroom, Dr.
Guan likes swimming, hiking, reading, and watching the History Channel.
xv
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xvii
Part 1
Part 2
Part 3
Part 4
BRIEF CONTENTS
Foundation Concepts 1
CHAPTER 1 Introduction to Cost Management 3
CHAPTER 2 Basic Cost Management Concepts 23
CHAPTER 3 Cost Behavior 50
CHAPTER 4 Activity-Based Costing 85
Fundamental Costing and Control 128
CHAPTER 5 Product and Service Costing: Job-Order System 130
CHAPTER 6 Product and Service Costing: A Process Systems
Approach 167
CHAPTER 7 Allocating Costs of Support Departments and Joint
Products 209
CHAPTER 8 Budgeting for Planning and Control 249
CHAPTER 9 Standard Costing: A Functional-Based Control Approach 297
CHAPTER 10 Decentralization: Responsibility Accounting, Performance
Evaluation, and Transfer Pricing 336
Advanced Costing and Control 374
CHAPTER 11 Strategic Cost Management 376
CHAPTER 12 Activity-Based Management 429
CHAPTER 13 The Balanced Scorecard: Strategic-Based Control 467
CHAPTER 14 Quality and Environmental Cost Management 497
CHAPTER 15 Productivity Measurement and Control 533
CHAPTER 16 Lean Accounting 562
Decision Making 588
CHAPTER 17 Cost-Volume-Pro t Analysis 590

CHAPTER 18 Activity Resource Usage Model and Tactical Decision
Making 632
CHAPTER 19 Pricing and Pro tability Analysis 669
CHAPTER 20 Capital Investment 714
CHAPTER 21 Inventory Management: Economic Order Quantity, JIT,
and the Theory of Constraints 760
Glossary 797
Subject Index 809
Company Index 831
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CONTENTS
Part 1 Foundation Concepts 1
CHAPTER 1 Introduction 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 Quality Management 10
Time as a Competitive Element 10
Ef ciency 10
The Role of the Management Accountant 10
Planning 10
Controlling 11
Continuous Improvement 11
Decision Making 11

Accounting and Ethical Conduct 12
Bene ts of Ethical Behavior 12
Standards of Ethical Conduct for Management Accountants 12
Certification 14
Certi cate in Management Accounting 14
Certi cate in Public Accounting 14
Certi cate in Internal 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 De nitions 27
Product Costs and External Financial Reporting 27
External Financial Statements 30
Income Statement: Manufacturing Firm 30
Income Statement: Service Organization 32
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xx Contents
Functional-Based and Activity-Based Cost Management Systems 33
Functional-Based Cost Management Systems: A Brief Overview 33
Activity-Based Cost Management Systems: 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
Scatterplot 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
Con dence 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: Plantwide Rate 87
Disposition of Overhead Variances 88
Overhead Application: Departmental Rates 89
Limitations of Plantwide and Departmental Rates 90
Non-Unit-Related Overhead Costs 90
Product Diversity 91
An Example Illustrating the Failure of Unit-Based Overhead Rates 91
ABC Users 96
Activity-Based Costing System 96
Activity Identi cation, De nition, and Classi cation 97

Assigning Costs of Overhead Resources to Activities 99
Assigning Secondary Activity Costs to Primary Activities 101
Cost Objects and Bills of Activities 102
Activity Rates and Product Costing 103
Reducing the Size and Complexity of an ABC System 103
Approximately Relevant ABC Systems 104
Time-Driven ABC Systems 106
Part 2: Fundamental Costing and Control 128
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 Products and Services 131
Setting Up the Cost Accounting 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 Tickets 139
Overhead Application 140
Unit Cost Calculation 140
Job-Order Costing: Specific Cost Flow Description 141
Accounting for Direct Labor Cost 142
Accounting for Overhead 143
Accounting for Finished Goods Inventory 144
Accounting for Cost of Goods Sold 146
Accounting for Nonmanufacturing Costs 148
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 Systems
Approach 167
Process-Costing Systems: Basic Operational and Cost
Concepts 167
Cost Flows 168
The Production Report 170
Unit Costs 170
Process Costing with No Beginning or Ending Work-in-Process
Inventories 172
Service Organizations 172
JIT Manufacturing Firms 172
The Role of Activity-Based Costing 173
Process Costing with Ending Work-in-Process Inventories 173
Equivalent Units 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
Journal Entries 179
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xxii Contents
Weighted Average Costing Method 180
Step 1: Physical Flow Analysis 181
Step 2: Calculation of Equivalent Units 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: Calculation of Equivalent Units 186
Step 3: Computation of Unit Costs 186
Step 4: Valuation of Inventories 186
Operation Costing 187
Basics of Operation Costing 188
Operation Costing Example 189
Appendix: Spoiled Units 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 Methods 225
Departmental Overhead Rates and Product Costing 225
Accounting for Joint Production Processes 226

Cost Separability and the Need for Allocation 227
Distinction and Similarity between Joint Products
and By-Products 227
Accounting for Joint Product 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
Sales Budget 254
Production Budget 255
Direct Materials Purchases Budget 255
Direct Labor Budget 256